Common sense might suggest the lower your insurance deductibles, the less you'll have to take out of your own pocket. Unfortunately, the issue is a bit more complex.
For the insurance company, the primary purpose of a deductible is to eliminate having to pay for typical minor and frequent losses, together with the necessary expenses related to adjusting them. In return for you agreeing to pay such losses, the insurer provides a rate credit against your premiums.
So does it follow that the higher the deductible, the greater the rate credit? Not necessarily. Once the rating factors reach a point where the vast majority of nuisance claims are no longer covered, the amount of expense the carrier can save by increasing the deductible amount becomes negligible — and so does the additional amount of premium credit to you.
For more on selecting a deductible amount for property-type coverage, see Choosing the Right Deductible for Homeowners Insurance.
Factors to consider
- How much can you afford to pay based on your financial comfort level and the expected frequency of your claims? For example, although a single $2,500 deductible might seem easy to absorb, what if you have several such claims in a year? If you anticipate low claims frequency in typical years, how financially painful will it be for you to take multiple deductible hits in a single bad year?
- How does the deductible apply under your various coverages? For example, a Property policy might have a single deductible that covers any single loss for all of your damaged or destroyed property, while other forms might apply the deductible separately to your building and business personal property. If you have several buildings at a single location damaged by a single occurrence — such as a major fire, tornado, or hurricane — will the deductible apply separately to each building, or only once to the loss to all the buildings?
- How much will you save? Once you know how much you have at risk due to the amount and application of your possible deductible amounts, consider your premium savings at each of the various deductible levels. Is the risk to your profit statement worth the savings in premium? Decide at what point the balance between the premium saved and the assets risked is most comfortable for you.
If you are comparing deductible structures across different types of coverage, including health plans, you may find it helpful to review general deductible concepts in other lines of insurance: Understanding Health Insurance Deductibles.
We'll be glad to review your current policy deductibles, how they apply, and what options and premium savings are available. Let us help make sure your program provides the best combination of cost and benefits now and in the future — or review with an insurance agent to discuss your specific needs.
Frequently Asked Questions
What does a deductible do?
A deductible is the amount you agree to pay on a covered loss before the insurer pays; it reduces small frequent claims and lowers premium costs.
Will a higher deductible always lower my premium significantly?
Not always; once nuisance claims are mostly excluded, raising the deductible further often produces only small additional premium savings.
How do I decide the right deductible for my business or home?
Compare your cash reserves, expected claim frequency, and the premium savings at each deductible level to find a balance that fits your risk tolerance.
Can deductibles apply differently across properties after a single event?
Yes; some policies apply a single deductible to the entire loss while others apply separate deductibles to each building or coverage item.