As a business owner, you buy commercial insurance to protect your company. But when making a purchase or evaluating an existing insurance policy, some of the terms and concepts can be a little murky at times. We get it, and we’re here to help. When evaluating your insurance needs, one of the most important concepts to understand is your insurance deductible.

When it comes to small business insurance, you’ll want to understand how an insurance deductible impacts your coverage. Follow along while we explain what an insurance deductible is, how insurance deductibles work, and more.

The low down on insurance deductibles

Put simply, an insurance deductible is the amount you’ll pay out of pocket toward a claim on your commercial insurance policy before your insurance provider contributes any money. The amount of an insurance deductible varies depending on the type of policy you have, the terms of your policy, and your monthly premium levels.

When you sign up for insurance, your insurer may offer you different deductible amounts. The deductible options are typically fixed dollar amounts. It may seem like a good idea to choose a lower deductible in case a covered accident occurs, but you’ll likely pay higher premiums as a result.

As a general rule, the more you pay per month in premiums, the less your insurance deductible will be. Conversely, lower premiums typically translate into a higher deductible because you share some of the risk with the insurance company.

How do insurance deductibles work?

Most business insurance policies have a deductible. For example, if your deductible is $500 and you have a claim for $1500 in damages, the insurance company will pay you $1,000 after considering your $500 deductible.

Imagine you’re a cosmetologist. In the middle of a session, your chair malfunctions, catapulting your client to the ground. Fortunately, you’ve purchased cosmetology insurance. After all, you know how litigious people can be when they don’t have the relaxing experience they expected.

Your client files a claim against you for $3,000 to cover their ER visit and medical bills. Although your insurance covers the claim, they will only cut a check for the covered amount, minus your deductible. That means if your deductible amount is $500, then the insurance company’s check will be $2,500 — the $3,000 amount for the covered claim minus your $500 insurance deductible.

Insurance deductibles and insurance premiums

We’ve already mentioned the term “insurance premium.” We’ll help make sure you understand this term because, again, insurance deductibles and insurance premiums are interrelated:

  • Premiums. Insurance premiums are the amount you pay to your insurance provider no matter what, regardless of whether there are any claims against you. If you pay $500 a month for your insurance, that’s $6,000 in annual premiums.
  • Deductibles. When something goes wrong, the deductible is the amount you pay in addition to your premium before your insurance provider pays the remainder of the claim. Deductibles are, in part, meant to keep people from filing small claims by encouraging them only to purchase the coverage they truly need.

How to calculate an insurance deductible

Remember, a fixed-dollar deductible is a specific amount that will be subtracted from a claim payment after the claim has been adjusted. For example, if your policy has a $1,000 deductible and your insurer has determined that you’ve sustained a loss worth $20,000 that your policy covers, you’ll receive a claim check for $19,000.

To calculate the amount of an insurance payout for an approved claim, use the following formula:

Total claim amount – your policy’s deductible = the insurance payout

There are “percentage deductibles,” but they are rarely used in small business insurance.

Choosing the right insurance deductible

Imagine your insurer offers several deductible options: $500, $1,000, or $2,000. How do you decide which is right for you?

Again, don’t assume that a lower deductible is always better. Lower deductibles are associated with higher premiums, while higher deductibles may lower the overall cost of your insurance premium.

To choose the right deductible, consider the following:

  • How much risk are you willing to adopt if an accident occurs?
  • How much could you realistically afford to pay in the event of a claim?

If your insurance deductible is $2,000, then, all else being equal, you’ll likely pay a lower premium than someone who selected a $500 deductible level. That’s because you’re taking on more of the risk if a claim is filed against you or your business.

If you think it’s pretty unlikely that someone will file a claim 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 $2,000.

Thimble: insurance created for you

Our mission to make insurance radically simple starts with helping you understand these basic terms, but we’ve incorporated 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 into a year-long policy, Thimble lets you choose from a policy by the job, month, or year. And with Thimble, our general liability insurance and professional liability insurance policies have a $0 deductible, so you’re covered from the first dollar you spend.

To find your perfect policy, just click “get a quote” on our website, or download the Thimble mobile app, answer a quick set of questions, receive your quote, and click to purchase — all within just a few minutes.

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