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. A standard deductible, or minimum deductible, is written into the policy to avoid numerous and costly small claims. Depending on the type of insurance and the coverage provided, a maximum deductible may also be written into the policy.
A simple example of how a deductible works is you file a claim with the insurance company for $8,500.00 for damages. The policy has a deductible of $1,000.00, so the insurance will pay out the claim for $7,500.00 to the business. That claim is considered to be fully paid.
Generally, the higher the deductible, the lower the premium is on the policy will be, 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.