Low Deductible or High Deductible — That’s the Question
How do you know what the right deductible is for your commercial insurance policy? It’s a good question, and it’s had me thinking lately about the best way to explain all the factors that need to be taken into consideration.
First things first, though…a definition. You likely already know this, but entertain me for just a second. A business’ (or anyone’s, for that matter) deductible is the amount not paid in a claim by your insurance policy.
OK…moving on. Your deductible should be something you spend a significant amount of time considering when purchasing commercial insurance. Understanding your deductibles can sometimes be complicated, but it’s a key part of managing your insurance premiums and having the necessary insight as to why those premiums are what they are.
In simple terms, the higher the deductible (you’re assuming more risk), the lower the premium is on your commercial policy and vice versa. So, the lower your deductible, the higher your premium is on your commercial policy. The question becomes, how do you know which way to go?
My recommendation is to first determine your risk and/or exposures for each commercial insurance policy you have or may need to add in the future. Depending on your risk and the type of insurance you’re purchasing, it may be wiser to pay a lower premium by selecting a higher deductible, which would provide an immediate positive impact on your cash flow.
Your cash flow is the lifeline of your business and, thus, one of the most important things to consider when deciding on deductibles for your insurance policies. If your cash flow is easily able to absorb a large deductible without jeopardizing your ability to pay other expenses, you’re in good shape to assume more risk and lower your insurance payments. Your insurance policy is designed to insulate you from the impacts of a catastrophic loss (for example: flood, earthquake, tornado, etc.) and having to shoulder the financial burden of recovering from that loss. Having a firm grip and understanding of your company’s financial position and your ability to use it in the event of a major loss will go a long way in helping you decide on whether a large or small deductible will work best for you.
Now, there are some advantages and disadvantages to each. I’ve outlined what they are for large deductibles, specifically, below. You should use these as items to consider when choosing the right deductible for your business.
Advantages to Large Deductibles
- There’s an immediate positive impact on your cash flow.
- You will have reduced insurance premiums.
- You’re allowed to self-insure and manage smaller claims. Small claims — when added up over a policy term — can cause larger renewal premiums and possible cancellation of your policy.
Disadvantages to Large Deductibles
- Your business may not have the financial means to take on the burden of a large loss.
- Claims settlements can sometimes be lengthy, so your business may have to pay out for any immediate construction costs, repairs, wages, etc., that are incurred until your claim is settled. This would be in addition to the large deductible you will have to pay on the claim itself.
- You can’t deduct insurance premium you didn’t pay, but you may be able to deduct a large loss from your taxes.
- Be aware that some contracts may limit the size of the deductible you can use on your insurance related to the contract.
As you can see, many factors play into the decision of whether a small or large deductible will work for your business. A conversation with your insurance professional discussing the risks and benefits of high versus low deductibles will help ensure you get the best value and coverage for your business and your financial state.
Like I said, the topic is tricky and complicated. Feel free to reach out to our team at Holmes Murphy to start the conversation. We’d love to help you sort this all out and answer any questions you may have!
Published on: 08.27.18