As a small business owner or employer, there are a variety of tasks you have to juggle, matters to consider, and investments to make. One of the most important steps you can take involves protecting your business by purchasing general liability insurance or professional liability insurance. But if you’re new to the insurance world, there are industry-specific terms that you may be unfamiliar with, which can have a huge impact on your plan.
Although there are a variety of industry terms you should know, it’s helpful to start at the beginning with the big three—premiums, limits, and deductibles. Understanding what each term means and how they impact one another will help you make more informed decisions. Below, we will cover everything you need to know about premiums and deductibles so you can become informed about your insurance expenses.
What are premiums?
The premium is the price you pay for your insurance policy. And, as is the case for most traditional continuous policies, you have to keep on regularly paying the premium, whether on a monthly, quarterly, or annual basis. That said, some insurance providers will decrease the total premium if you pay the year’s entire amount in one lump sum.
Failure to pay your insurance premium will result in some sort of warning mechanism followed by a cancellation of the plan or lapse in coverage. Typically, after the premium due date has passed, there is a grace period in which you can pay what you owe. However, after a certain point, the policy will expire, and your business will be exposed to liability, potential loss, and damages.
There are a variety of factors that can impact how premiums are determined including:
- Business type Insurance history
- Business location
- Type of insurance you’re purchasing
- Desired level of coverage
- Selected policy limits
- Policy riders
- Business revenue and assets
All of these elements help build a risk profile and set a premium price. High-risk industries will pay higher premiums, while low-risk industries pay lower premiums. For example, a contracting and construction business might pay four times as much in premiums as a small photo and video business.
And it makes sense why the price disparity occurs—contractors spend a great deal of time working on someone else’s property, which exposes them to increased levels of potential damage and expenses. On the other hand, someone who takes photos and videos might have little to no interaction with third parties and fewer inherent risks. Therefore, they enjoy cheaper premiums.
What is a policy limit?
Also known as the limit of liability—if your business causes damages to a third party, there’s a ceiling at which a settlement for a liability claim is capped. Once it is reached or surpassed, the insurance provider will no longer cover expenses.
As the policyholder, you typically have different policy limits to choose between, with the smaller limits resulting in cheaper premiums and the higher coverage in costlier premiums. When it comes to general liability insurance and professional liability insurance there are policy-specific types of coverage limits worth mentioning:
- Aggregate Limits – These determine that the maximum amount of damages your policy will cover during a given policy period, which is typically a year.
- Per-Occurrence Limits – These state a limit as to how much your policy would pay for a specific liability episode. Most E&O Insurance will have per-occurrence limits.
If the value of your total claims in a year exceeds your aggregate limit, you would have to cover the difference by paying out-of-pocket expenses.
What is a deductible?
Deductibles often referred to as your “annual deductible,” is a term related to the payments made on your liability insurance policy. It is the figure that you and your insurance company agree upon ahead of time as the out-of-pocket expenses you must pay before the coverage on the policy kicks in. This and the policy limits constitute a form of risk-sharing between the business and the insurance provider. In most cases, general liability insurance policies have low (if not zero) deductibles, while professional liability insurance policies have a higher deductible.
In a sense, they’re a way that an insurance provider reduces or avoids spending a lot of time and money dealing with small, nebulous claims. These benefits are then passed on to small business owners in the form of lower insurance premium costs. Typically, there are three primary forms of deductibles:
- Flat Deductibles – A settled dollar figure that is the same no matter the case.
- Percentage Deductible – A percentage that is based upon the total value of the property.
- Waiting-Period Deductible – If your business is interrupted whether due to damages or breach, the business has to be shut down for a certain amount of days in order to qualify for payments.
Imagine you have a general liability insurance policy for your painting business with a flat deductible of $500 and a policy limit of $1,000,000. While on the job, you accidentally track paint all over their furniture, resulting in $3,500 dollars of damages. In such a case, you’d have to pay the first $500 of the deductible and then your policy could cover the remaining $3,000. Of course, this is just one example; every situation is unique and is treated as such.
Deductible vs. premium
While premiums have to be paid regularly, you may go an entire coverage period without ever paying an annual deductible. That said, you and your insurance company will have to negotiate your deductible, which will then impact the price of your premium.
In most cases, the provider will initially set the policy at the minimum deductible, which would have the highest premiums. However, if you believe there’s a lower risk of something occurring and its more to prevent catastrophe, you may decide it’s worth it to have a higher deductible in order to pay a lower premium.
But what’s better— a high premium with a low deductible or a lower premium and higher deductible? Frankly, it depends on your financial situation and the level of risk your business faces.
Are you covered?
Now that you know the difference between premiums and deductibles, it’s time to protect your business from liability. With Thimble, you can purchase on-demand insurance policies that have a policy limit of $1,000,000 or $2,000,000 and (like we talked about) $0 deductible.
Select a policy by the hour, day, or month. Thimble is redefining the insurance industry by covering only you when you’re working, and saving when you’re not. Thimble’s General Liability Insurance has a zero-dollar deductible, incredibly affordable premiums, access to unlimited COIs, and free Additional Insureds.
Do you have an upcoming job and lack coverage? Just visit the Thimble mobile app or website and get started. In 60 seconds, you can go from being exposed to having a Certificate of Insurance. It’s that easy. It’s Thimble.
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.