The underlying intent of insurance is to cover larger or significant losses, not minor ones. By sharing risk with the insurer via a deductible, the expensive costs of adjudicating minor losses are avoided, which translates into premium savings. Of course, your deductible also reduces the amount paid by an insurer for the claims you do file, which provides another basis for an insurer to lower your premium.
Most business people understand that a higher deductible results in a lower insurance premium. However, there are several vital points to consider before opting for a higher deductible:
How much risk are you willing to bear?
Not every business owner has the same tolerance toward risk. Risk acceptability should be premised on the general practice of others in your industry and your business’ current and projected cash flow predictions.
Insurance coverage with a higher premium / low deductible might appear to be more expensive and less tempting in the short-term. However, the psychological impact of a significant loss while possessing coverage with a lower premium / high deductible could have serious consequences to your bottom line when you actually suffer a significant loss.
You have to weigh carefully the pros and cons of what you can pay in premiums versus how much deductible you’ll have to absorb in the event of a significant loss.
Not all deductibles are equal.
Savings on premiums are not necessarily proportionate to higher deductibles. Although a $1,000 deductible might save you $200 in monthly premiums and a $2,000 deductible saves you $400 in premiums, a $3,000 deductible might only result in a $450 premium saving which is a smaller ratio in terms of costs versus benefits. The ratio of premium savings relative to higher deductibles will vary among insurance carriers. Consult with our insurance brokers to secure coverage which not only offers the best insurance benefits to cost ratio, but which is practical to the financial realities of your business.
Also, deductibles can be applied differently for different types of policies. The most common deductible types are:
- Aggregate Deductible – the most common type of deductible you will find on a Commercial policy. This refers to a single deductible which applies for all losses during the policy period. If you have $18,000 in total claims and an aggregate deductible in the amount of $7,500, then you would receive $10,500 from your insurance carrier.
Straight Deductible – the deductible you will pay for each and every claim you make during the policy period. Were you to have a straight deductible for your fleet and you incur three collision claims, then the ascribed deductible would be applied separately to each of the three claims.
Before considering a deductible change, be sure to consult with one of our insurance brokers to fully understand your options.