Business insurance is an important part of any business, but what many policy holders aren’t aware of is that the coverage doesn’t necessarily cover all expenses from the first dollar when a claim is made. Instead, most providers charge a deductible, and coverage only begins above this amount. What is a deductible, how much is a reasonable amount to pay, and how exactly does this insurance caveat work? Let’s delve into the topic.
What Is a Deductible?
A deductible is the amount of money that you will be required to pay in the even of an incident resulting in an insurance claim. After that amount, your insurance policy will take over the payment, at least until the cost reaches your insurance limits.
In the vast majority of cases, you need to pay out the deductible before the insurance claim will be covered by your insurer.
A deductible is generally a set dollar amount. For example, let's imagine you have a $500,000 general liability policy with a $500 deductible. If a wall in the house you are working on gets damaged and costs $20,000 to fix, you’ll need to pay $500 towards the damages, and then your insurance company will pay for the rest, up to the per claim limit. Alternatively, the deductible can be calculated according to a percentage of the building’s value. For example, if your $250,000 project collapses due to an earthquake, and your deductible is 10%, you’ll need to pay $25,000 before the policy is activated.
You can see how much your deductible is by looking at the terms of your insurance policy or by asking your insurance company directly. Additionally, you should clarify if there are multiple deductibles for different types of insurance you may have. A company may charge you low deductibles for the general liability insurance, but charge you $500 for professional liability insurance. For example, here at Next Insurance, for our policies for certain professionals including personal trainers and cleaners, there is a $0 deductible on general liability insurance and a $500 deductible on professional liability insurance.
Buyers shop around to find competitive rates for their insurance policies, and deductibles are no different. There are good companies (like Next Insurance!) that offer either zero dollar or low deductibles for their policies, so customers aren't faced with unexpected outlays of cash. Just bear in mind that this is only one aspect of the policy, and all factors need to be considered when making a final decision.
Deductibles vs. Premiums
It’s important to understand the difference between the deductible and the premium. Since both are amounts that you may need to pay to your insurance company, it can be confusing to understand the difference.
The premium is the monthly, quarterly, or yearly payments that you’re paying for your policy. For example, if you have a policy that costs $1,200 per year, your monthly cost would be $100. That amount won't change based on what happens over the course of the year--claim or no claim, that's the price.
The deductible is a fee that you pay each time you have an incident where you make a claim and the insurance provider needs to cover you. If you have multiple claims over the course of one year, you’ll end up paying the deductible more than once, and if you have no claims, you may not pay a deductible at all. For instance, most of our customers don't make claims so they don't need to pay a deductible. A deductible is the amount you pay if something happens that's covered by your insurance.
High or Low Deductibles – Which is Better?
Given the above information, you might assume that a lower deductible is always the preferred option. In fact, that’s not always the case. Many insurers will offer a lower policy price if you’re willing to pay a higher deductible. This is simply a matter of risk management. The insurance provider is taking on a risk that they will have to pay for your work-related accidents. Therefore, if you show them that you’re willing to take on more of the risk (by paying a higher deductible in the event of an accident), then the company takes less risk and can afford to charge you less overall on the policy.
Here at Next Insurance, we offer affordable premiums and low deductibles to all our customers. You won't get a better rate with us by paying a higher deductible; we don't think it's fair for you to get punished with a large bill if something happens.
A higher or lower deductible is more beneficial to you depending on your business, workers, projects, and more. If you frequently have accidents, need to replace equipment, or are calling on your policy for any other reason, then a low deductible is better for you. If you only need your insurance policy for legal reasons or the infrequent occurrence, then a higher deductible will save you money on your annual policy payments. The question of what is a deductible and what it means for your business is an important one to consider when buying insurance.