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As a small business owner, you have many tasks on your to-do list, but reading an insurance dictionary to understand the terms of your policy doesn’t have to be one of them. Let’s start at the beginning with two of the most important terms: premiums and deductibles. Understanding what they mean will help you make better insurance purchasing decisions for your small business. Below, we will cover everything you need to know about insurance premiums vs. deductibles, how deductibles affect your premium, and the pros and cons of having higher limits or deductibles.
What are insurance premiums?
Your insurance premium is the price you pay for your insurance policy. As is the case for most continuous policies (those without a lapse in coverage), you will need to pay the premium on a monthly, quarterly, or annual basis. It’s important to pay your insurance premium according to your contract or you could risk a lapse in coverage.
There are a variety of factors that can impact how premiums are determined, including:
- Business type and industry
- Business location
- Insurance and claims history
- Type of insurance you’re purchasing
- Desired level of coverage
- Selected policy limits
- Policy riders (additional coverage purchased on your policy)
- Your revenue base and asset-to-liability ratio (for some lines of coverage)
All of these elements help build a risk profile and help determine your insurance premium. High-risk industries will pay higher premiums, while low-risk industries pay lower premiums. For example, a contracting and construction business that employs subcontractors will pay higher premiums for general liability insurance and workers’ compensation than a one-person photo and video business.
To explain why, consider the difference in working conditions: contractors often work at locations that expose them to the potential of causing injury to their workers or others, and they are also at greater risk of damaging others’ property. On the other hand, someone who takes photos and videos might have little interaction with third parties and fewer inherent risks as they don’t work with dangerous tools and equipment. Therefore, they pay lower premiums.
It’s important to stay current with your premium payments. If you miss a payment, your insurance company will warn you before eventually canceling the policy. 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 be canceled and your business will be exposed to financial risk due to third-party liability, and potential property loss. This could result in the loss of customers or violation of contractual requirements.
What is a deductible?
An insurance deductible is a term related to the payments made on your liability insurance policy. It is the number that you and your insurance company agree upon as the out-of-pocket expense you are responsible for when a claim is paid. The deductible, as well as the policy limits (the maximum amount the insurance company will pay per covered event), 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 and commercial property policies will have deductible choices. Typically, there are three primary forms of deductibles:
- Flat Deductibles – A settled dollar figure that is the same no matter the covered event.
- Percentage Deductible – In commercial property insurance, a percentage based on the total value of the property that is being covered.
- Waiting-Period Deductible – This type of deductible requires an agreed-upon amount of time to pass before claim coverage kicks in. This is typically a few days but can be as brief as a matter of hours.
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 your customers’ furniture, resulting in $3,500 dollars of damages. In such a case, your insurance policy pays $3,000 and you pay $500. Of course, this is just one example; every claim is unique.
How deductibles affect your insurance premium
When you bind coverage for an insurance policy, your insurance company will present you with deductible options. The deductible you choose impacts the price of your premium. There is an inverse relationship between the size of the deductible and the amount of the premium: The higher the deductible, the lower the premium and vice versa.
For example, If you are confident that you’re in control of your business risks, you may be willing to pay a higher deductible, since you think you will have few (or no) claims during the policy period. However, if you have uncertain exposures or are in a high-risk industry, you may elect a lower deductible while acknowledging a higher possibility of claims.
In most cases, the insurance 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 an accident occurring, it may be worth having 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. Let’s explore further.
Higher limits or higher deductibles: pros and cons
Yes, you want to make sure that your premiums are paid in order to safeguard your business from any risks, but for any small business owner, premiums can add up. You need to know how your selected deductibles and limits will affect your bill.
When thinking about potential claim scenarios, lower deductibles can seem like a better option, but lower deductibles can mean higher premiums. And conversely, the higher your deductible, the lower your premium. But you run the risk of being responsible for a higher deductible if you do file a claim, which could be financially cumbersome for your small business.
As for policy limits, there are two kinds: per occurrence limits and aggregate limits. In short, an occurrence is a single covered claim event (e.g., one incidence of bodily injury or property damage). With each occurrence limit policy, each covered claim could reach the policy “per occurrence” limit. The policy could pay multiple claims that reach the full occurrence limit during the policy term.
An aggregate limit, on the other hand, refers to the maximum amount your insurance company will cover for all claims combined for the policy term over the course of your policy.
For both per occurrence and aggregate limit policies, higher limits and lower deductible means higher insurance premium. If you are interested in alternative ways to get a lower premium, contact your insurance agent or insurance company to discuss ways to maximize your coverage while saving money. If your business is likely to be hit with a high-value claim, having a policy with a higher limit and higher premium may be worth the investment. It could save your company from the possibility of paying excess claims amounts if your policy limit is inadequate.
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 general liability insurance policies that have a policy limit of $1,000,000 or $2,000,000 and deductible options as low as $0.
Thimble’s small business insurance is designed for small businesses of any size and every stage while putting you in control. You can modify, pause, or cancel coverage instantly, access unlimited Certificates of Insurance (COIs), and add Additional Insureds at no additional cost.
Just visit the Thimble mobile app or website and get started. In minutes, you can go from being exposed to being secure. It’s that easy. It’s Thimble.