Deductibles Explained

When paying a claim, your insurance policy will pay the covered loss minus your deductible which you chose and has been written into the policy. You are responsible for the deductible.

An insurance deductible is the fixed amount, or sometimes a percentage of an insurance claim which is what the insured person has to pay before the insurance kicks in.

So In other words, if you have a policy with a $1,000 deductible, and you file a claim for $30,000, you have to pay $1,000 before the insurance company issues a check for the other $29,000.

Deductibles were created, in large part, in order to keep people from filing large numbers of small claims, which cause more work on the insurance and claims end than revenue generated, while covering large claims, which is why most people have insurance to begin with.

You are generally going to be able to choose what deductible amount you are comfortable with above a standard deductible which the insurance company has set. This gives you some control over the cost of your policy. Generally speaking, the higher the deductible, the lower the premium is on the policy and vice versa.

In order to find which deductible is going to work for you, you will have to weigh the risk and projected impact of a loss against the cost of the premium in your cash flow analysis.

It is important to note that it might sound sensible, after analyzing your monthly cash flow, to choose the highest deductible in order to get the lowest premium. That may be dangerous.

If in order to scrape the amount of the deductible in the event of a loss, you would cripple your business, then you should probably choose a lower deductible and free up enough money monthly in order to pay the higher premium.

Another important piece of information which should go into the decision is how you, the insured, will recoup your loss. If your insurance policy is written to give you “replacement cost,” that will cover replacement or repair of the insured property at what it worth at the time of the repair or replacement. If it is a “cash value” coverage, it will replace covered property at what that property cost you, less depreciation.

Replacement cost will, of course, have a higher premium than cash value will have.

As always, we advise people to work with their licensed insurance professional in order to make the wisest decision and get the best coverage for their business without sacrificing value.

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What’s The Right Deductible For My Commercial Insurance?

Your commercial insurance policy will pay a covered loss, minus any deductible written into the policy that it will not pay.  A deductible is a fixed amount or a percentage of an insurance claim which is to be paid by the carrier.

Deductible amounts can be voluntary, meaning, a business owner can choose a higher deductible to help reduce premiums, but there is generally a standard deductible.  Insurance carriers impose these standard deductions to avoid numerous small claims.

The claim process for the carrier is expensive, running through layers of employee and departments before a claim is ever paid.

An example of how a deductible works would be that your damage is estimated at $7500.00 and you have a deductible of $800.00 on this policy.  The check for claim you receive from your insurance company would subtract the deductible, in this case, $800.00 and you would receive a check for $6700.00 to settle the claim.  The additional $800.00 will be the responsibility of the business.

Normally, the higher the deductible, the lower the premium is on the policy and vice versa.  In deciding on a deductible, it pays to weigh the risk and the impact of a loss as well as the premium in your cash flow analysis.

While it may make sense for your monthly cash flow to pick the highest deductible and lowest premium, it may be exposing your business to a serious risk.  If your business would be crippled coming up with the money to cover a high deductible in the event of a loss, then it’s probably too high a deductible.

This is where the savvy small business owner works with their commercial insurance agent or broker to get the best value and coverage for their business.

While deciding on the deductible, another aspect to review is how you as the insured will recoup your loss.  A ‘cash value’ basis is a replacement of cost less any depreciation.  A replacement cost will repair or replace the insured property at its present cost without depreciation.  Naturally, replacement cost will have a higher premium than cash value.

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Business Insurance Deductibles

What should I have as a business insurance deductible?

Generally, the higher the deductible, the lower the premium is on the policy and vice versa. In deciding on a deductible, it pays to weigh the risk and the impact of a loss as well as the premium in your cash flow analysis. While it may make sense for your monthly cash flow to pick the highest deductible and lowest premium, it may be exposing your business to a serious risk.

If your business would be crippled coming up with the money to cover a high deductible in the event of a loss, then it’s probably too high a deductible. This is where the savvy small business owner works with their licensed insurance professional to get the best value and coverage for their business.

Let’s look more closely at policies and deductibles. Your insurance policy will pay a covered loss, minus any deductible written into the policy that it will not pay. A deductible is a fixed amount or a percentage of an insurance claim which is to be paid by the insured.

Deductible amounts can be voluntary, meaning, an insured can choose a higher deductible to help reduce premiums, but there is generally a standard deductible. Insurance companies impose these standard deductions to avoid numerous small claims. An example would be that your damage is estimated at $7500.00 and you have a deductible of $800.00 on this policy.

The check for claim you receive from your insurance company would subtract the deductible, in this case, $800.00 and you would receive a check for $6700.00 to settle the claim.

While deciding on the deductible, another aspect to review is how you as the insured will recoup your loss. A ‘cash value’ basis is a replacement of cost less any depreciation. A replacement cost will repair or replace the insured property at its present cost without depreciation.

Naturally, replacement cost will have a higher premium than cash value. Make sure you understand how your claim will be paid. How have costs and materials increased?

Your commercial insurance broker can work through various scenarios with you to make sure you understand how a loss would be compensated.

Determining Deductibles for Your Business Insurance

You might have asked yourself how you should determine what deductible is right for your business insurance.

First, let’s review what a deductible is and how it works in regards to your business insurance policy. Your insurance carrier will cover almost all of a covered loss, saving your business from a large, sometimes crippling cash outlay.  The portion not covered is your deductible, the amount you have agreed to be responsible for paying.

Say a covered claim is $10,000 and your deductible is $2,500, then the insurance company pays $7,500 and your business is required to pay the remaining $2,500.  No matter if the claim is $2,000 or $40,000, subject to coverage limits (the maximum a policy will pay) your deductible remains at $2,500.

So, in the case of the $2,000, it is paid 100% by the business because the deductible was not met.  Deductibles can usually be negotiated or have a tier system to choose from.  It’s important to understand the impact your deductible will have in the event a claim is made.

The higher the deductible, the lower the premium and vice versa for the policy.  Determine the risk and exposure for each policy type your business has in place or may need to add.  Depending on the risk, and the type of insurance, it may make sense to pay a lower premium and a higher deductible for your business.  While this would certainly be a good thing for cash flow, some risk may be high enough to justify the lower deductible and higher premium.

Look at the risk and make sure a claim wouldn’t jeopardize the financial solvency of the business.  The question needed to be asked is can my business afford to pay this deductible in the event of an incident. Work with your insurance professional to maximize coverage while making the premiums affordable.   Make sure as you work together to put together scenarios and the results and impact of filing a claim.

Property insurance deductibles can also be figured by an individual claim basis or an aggregate basis.  Typically, small companies with no or few claims will find the individual claim basis attractive.  However, if your company or industry has a large number of claims annually, it may be prudent to look at the aggregate basis.

Finding appropriate coverage and affordable premiums starts with your licensed insurance professional.  Other resources to use are your state department of insurance as well as any industry associations. Together with your agent, you will put together an insurance package with the right deductibles and coverage to protect your small business.

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Commercial Insurance Deductibles

Can I raise my commercial insurance deductibles?

First, that question is way too broad. A business may have many types of insurance with many types of coverage and deductibles. Let’s narrow down the question as it relates to specific business insurance.

As a general rule, the insurance carrier who issued the policy will cover the loss up to the specific dollar limit less any commercial insurance deductible. This will save your company in some cases from a cash outlay which could disable or even close your business. The portion not covered by the deductible is what you are required to pay.

It makes sense to review each policy and determine what deductible makes sense today versus when the policy was issued. For instance, say a covered claim is $10,000 and your deductible is $2,500, then the insurance company pays $7,500 and your business is required to pay the remaining $2500. Whether the claim is $2,000 or $40,000, subject to coverage limits (the maximum a policy will pay) your deductible remains at $2,500. So, in the case of the $2,000, it is paid 100% by the business because the deductible was not met.

Commercial Insurance Deductibles can usually be negotiated or have a tier system to choose from. When first starting out, it’s quite possible your business could only afford a minimal deductible. Now, it’s possible that in fact you could cover substantially more for a deductible. Talk with your licensed insurance professional to determine what makes sense. It’s also a good time to review coverage limits as well. If your business has grown, it’s possible your coverage needs to as well.

Property insurance deductibles can also be figured by an individual claim basis or an aggregate basis. Typically, small companies with no or few claims will find the individual claim basis attractive. However, if your company or industry has a large number of claims annually, it may be prudent to look at the aggregate basis.

The best possible way to reduce costs is work with your licensed insurance professional. Review each business insurance policy and together determine what commercial insurance deductibles make sense and offer the protection needed in the event of an incident.

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