When it comes to common insurance terms like ‘deductible,’ you might have a little familiarity with the concept from your experience with your health or car insurance. You were paying a few hundred dollars a month for your health insurance coverage, so when you visited a podiatrist, you assumed your medical expenses would be covered. Then you got hit with a bill for $1,000. When you called the company asking for an explanation, they reminded you—that’s your annual deductible.
Deductible 101: what is a deductible?
A deductible is the amount you’re required to pay out of pocket toward a claim before your insurance provider kicks in any money. That amount can vary depending on the policy and is usually linked to your monthly premium; the more you pay per month, the less you’d likely pay overall. That’s true when it comes to your medical expenses or claims related to your business, with either a general liability insurance or professional liability insurance policy. But do you have to have a deductible? Not necessarily. Read on to find out more.
Maybe it didn’t make sense then, and maybe it still doesn’t make sense now. But when it comes to small business insurance, you’ll want to understand what an annual deductible is and how it impacts your insurance coverage. This guide is designed to answer all your questions so you can find an insurance policy that’s right for you and your business.
Imagine you’re a cosmetologist whose table malfunctions in the middle of a session, catapulting your client to the ground. You’ve taken out a general liability and professional liability insurance policy plan—after all, you know how litigious people can be when they don’t have the relaxing experience they expected. When your client files a claim against you covering their ER visit and medical bills, the resulting damages are $3,000.
Although your insurance covers the claim for the medical services, they only cut the check for $2,000. You learn you haven’t met your $1,000 deductible, so that amount has to come out of your business bank account before your insurance kicks in to cover the rest. Ouch.
Remember: a deductible is the amount you’ll pay out-of-pocket when a client files a successful insurance claim against you before your policy’s coverage takes effect.
Almost all business insurance comes with a deductible, and it’s usually a set dollar-amount, but your insurer may even offer you different deductibles when you sign up for insurance, affecting your policy rate (the amount you agree to pay when you click ‘Purchase’). In some cases, however, your deductible might be set at a percentage of your policy.
When your deductible is $500, you’ll have to pay $500 to successful claimants before your insurer takes over the remaining payment due, whether the claim is for $505 or $500,000.
Deductibles and insurance premiums
Another common word: ‘premium.’ But what is it? Let’s slow it down and discuss the difference between deductibles and premiums.
Insurance premiums are the amount you pay to your insurance provider, whether or not any claims are filed against you. Do you pay $50 a month for your insurance? Over 12 months, that’s a $6,000 annual premium. Premium: the amount no matter what.
Deductibles are the amount you pay in the event of an insurance claim. When something goes wrong, you’ll pay out this amount on top of your premium before your insurance provider pays out some or all of the remainder of the claim.
Basically, paying your premium gives you access to insurance money, and paying your deductible is how you get the insurance money itself. Make sense?
These two numbers are by no means unrelated. In fact, many insurers give you a chance to select your deductible, and the number you choose could greatly affect insurance premiums. How much you’re willing to pay out of pocket changes how much they’ll charge you before they pay.
Deductibles are, in part, intended to keep people from filing small claims. If you host scrapbooking workshops, you didn’t take out your $1 million policy limit to protect you from a clients’ potential paper cut, but from something a little more extreme.
Therefore, insurers often provide clients the opportunity to decide how much they’re willing to pay out of pocket in the event of a claim. Do you want to be protected against small claims, or only big ones?
Selecting a deductible
Imagine your insurer offers a few deductible options: $500, $1,000, or $2,000. How do you decide which is right for you?
Don’t assume that a lower deductible is always better. Lower deductibles are associated with higher premium prices, while higher deductibles may lower the cost of your insurance (premium) overall.
In order to make your decision about your deductible, you’ll need to consider how much risk you’re willing to take on, and how much you could realistically afford to pay in the event of a claim.
If your deductible is $2,000, you’ll likely pay a lower premium than someone who has selected $500. That’s because you’re taking on more of the risk in the event that a claim is filed against you or your business.
If you think it’s pretty unlikely that a claim will be filed against you, you might be willing to take the risk of a larger, $2,000 out-of-pocket payout in exchange for that lower monthly premium.
However, if you know $2,000 in out-of-pocket expenses would cause you and your business major cash flow problems, you might be willing to pay a higher premium and shell out more on a month-to-month basis. At least you’ll know that if a claim is filed, you won’t be on the hook for $2k.
The bottom line is that a higher deductible may mean a lower premium. Consider carefully which you’d prefer—a lower monthly premium and a higher deductible, or a higher monthly premium and a lower deductible when something goes wrong.
Thimble: insurance created for you
Our mission to make insurance radically simple starts with helping you understand these basic terms, but we’ve taken simplicity into everything we do.
Looking for more ways to keep insurance costs down? Thimble’s flexible coverage is an affordable way to protect your business. While other companies might lock you in to a year-long policy, Thimble lets you choose from hourly, daily, or monthly coverage so your insurance is only active when you’re working. This pay-when-you’re-working structure is what allows us to provide such affordable rates.
And with Thimble, all policies have a $0 deductible, so you’re covered from the first dollar you spend.
To get a quote, use our website (click “Get a Quote”) or download the Thimble app to enter your ZIP code, your profession, and your desired coverage limit. You’ll get an instant quote, and you can complete your purchase and receive a Certificate of Insurance in less than 60 seconds.
Now, you (and all your newfound insurance knowledge!) can go confidently into your workday, get protected with Thimble, and accomplish more than ever.
Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.