As insurance costs rise, more individuals, families and businesses are looking at using higher deductibles. Choosing the right insurance deductible is important and it does take some thought.
There are advantages and disadvantages to increasing your deductibles. So here are some things to consider before you make a decision to increase your personal or business insurance deductibles. First, let’s take a look at individual and family considerations and then we’ll look at business considerations.
The idea behind insurance is to save you from a catastrophic loss from which you cannot recover. This sounds reasonable but it does not mean everyone should use high deductibles. For example, if you are elderly and living on a fixed income, high deductibles are not likely a good choice. Especially, if your savings are limited. This may be true for younger insurance buyers, too. If you have no savings or the ability to borrow, you should consider a low to moderate deductible.
In addition, you must consider the worst case scenario before choosing a deductible. When a catastrophic event occurs, it may involve your home and your auto. Can you stand the financial impact of two large deductibles for the same occurrence? If not look for a policy that only charges one deductible if both your home and auto are involved in the same claim.
If your circumstances allow you to consider a larger deductible, here are the advantages and disadvantages:
Advantages
- Higher deductibles reduce your insurance costs.
- Allows you to self insure minor claims.
- Improves your cash flow.
- Removes the temptation to turn in small claims, which can result in larger premiums and can lead to policy cancellation.
Disadvantages
- You may not have the financial ability to pay for a larger loss out of your pocket.
- Sometimes claims take a while to settle, so you may be forced to fund more than just the deductible on a temporary basis if your claim requires immediate repairs.
Buying Tip: Most insurance companies have a “sweet spot” regarding deductibles. You may find that a $2,500 deductible has less impact on your premium than a $1,000 deductible. Request pricing using several deductible options, that way you can determine the best value.
Business Insurance and Deductibles
A business may have more deductible options than are available to personal insurance buyers. A business may also have more flexibility in using large deductibles. Evaluating how to use large deductibles to manage business insurance premiums takes some planning. Here are the advantages and disadvantages for the business use of high deductibles.
Advantages
- Allows you to self insure and manage smaller nuisance claims.
- Large deductibles allow flexibility. If your business buys several types of insurance policies, you can use large deductibles on just the policies and exposures you choose.
- If you use very large deductibles, you get the advantages of self insurance without the regulatory burden many states apply to business self insurance programs.
- You can use large deductibles to weather the dramatic swings in business insurance pricing which occur on a cyclic basis.
- You can use large deductibles to control premiums after a large loss. If your business suffers a large claim and your premiums for that line of exposure have risen dramatically, use a large deductible to control or reduce the increase in premium.
- Large deductibles can increase your cash flow by lowering your insurance premiums.
Disadvantages
- You can’t expense off a premium you did not pay, but you may be able to deduct your share of a large loss from your taxes.
- A large loss when your cash flow is slim can use up your reserves or force you to borrow.
- Some large commercial claims can take so long to settle that the claim process can impact your cash flow. I suggest being very cautious about putting large deductibles on liability lines of insurance for this reason.
- Beware that some contractual relationships, such as leases and construction contracts, may limit the size of the deductible you are allowed to use on insurance related to the contract.
Buyer Tip: You may have a hidden deductible about which you are unaware. It is called co-insurance. Many commercial insurance policies contain a co-insurance clause. Co-insurance requires that you insure to value as agreed to in the policy. If you do not, your claim settlement will be substantially less than you expected after the co-insurance penalty and deductible are applied.
Large deductibles do have advantages…but not for everyone. You must evaluate your situation to determine the advantages right for your family or business.
