The Important Role of a Deductible

Most property on an insurance policy has a deductible so it is important to understand the purpose and how it will impact you.   In order to understand deductibles, we should talk about insurance companies and insurance policies. When you purchase an insurance policy you are entering into an agreement with the insurance company that you will pay a certain amount of premium in exchange for monetary reimbursement for items damaged or ruined by a covered cause of loss.  You are also agreeing to other provisions, but we can discuss that topic another time.
 
Deductibles, in essence, make you a partner with the insurance company.  You and the insurance company both agree to pay, in the event of a loss, using deductibles. The deductible is the amount that you are responsible for.  Common values of deductibles are $500, $1000, $2500, $5000, $10,000, $25,000, and can go higher. The goal of a deductible is to give you “some skin in the game”, with the insurance company. It’s important to remember, the purpose of Insurance is to help you put things back the way they were before a loss or make you whole.  It is not for maintenance or minor incidents and you should never gain a profit by being reimbursed by the Insurance company. The insurance company does not want you to submit claims for every minor thing that occurs. That’s where deductibles come in, by not paying for every minor loss the company is able to cover you for financially devastating losses at an affordable price.
 
In the past, higher deductibles helped lower the price of premiums because the insured covered more of the potential loss today, this is not always the case. In the last few years, the United States has experienced an increase of devastating losses on a larger scale which has had a huge impact on the insurance industry. As a result, the insurance companies need to respond in a manner that allows them to pay claims and offer their products at an affordable price while still staying in business. Often you will see deductibles used to help (extend the financial risk to Insureds)  This approach reduces the impact deductibles now have on your premium  versus previous years.
 
It is always important to look at the property that you’re insuring and determine what you can afford to
cover (through a deductible) in the event of a significant loss. When the loss  is settled by the adjuster you receive the cost of the claim minus the deductible. This is where your partnership with the insurance company exists, and you are responsible to pay  your agreed upon portion. You do not need to have the same deductible for everything.  Smaller deductibles are often used for private passenger vehicles and a slightly higher deductible for larger trucks and heavy weight vehicles.  Higher deductibles tend to be utilized with high valued buildings to help offset the cost of rebuilding these buildings.  Insurance companies have started requiring higher deductibles on the larger structures in many cases.  
 
When reviewing your Insurance policy, it is important to check that you have the appropriate deductible on all your property. You want to make sure you will receive appropriate reimbursement from the insurance company after the deductible is subtracted. We have reviewed many insurance policies and seen buildings valued at $10,000 with a $5,000 deductible. While it does not generate a high premium the question is will that amount of money work for you in the event you need to replace that building? That’s only a question you can answer. You need to weigh the financial cost of replacing a piece of property with the premium being paid and what the insurance company will pay you. A licensed agent can make suggestions to the client, but it is always better when  you choose how you want your insurance program to respond. Everyone has a different philosophy on insurance, the most important thing is, when a policy is put together properly, it saves  you from going out of business. That is a win for everyone. 
 
So, in review it is important to understand the purpose of an insurance policy and the relationship you have with the insurance company.  You also want to review your deductibles to make sure they are cost effective and ultimately what you can afford. Deductibles may seem as a minor detail when reviewing you Insurance program but can play a major role in the event of a covered loss.