A deductible is the amount of loss that an insured must pay before the insurance carrier pays the first dollar on the claim.  Sometimes deductibles are non monetary; for example in the form of a waiting period.  A business interruption policy may have a 30, 60 or 90 day waitning period before insurance pays for the lost income.  However most deductibles are in dollars; for example a $500 deductible may be chosen for an auto insurance policy.

Of course premium is directly related to deductible.  For example, a homeowners policy with a $500 deductible is considerably more expensive than one with a $2,500 deductible. The reasons for this fact are: (1) with a higher deductible, the insured is telling the insurance carrier that he/she will take care of the more common small losses.  They only want insurance to pay the occasional more costly claims. and  (2) insurance carriers believe that when the insured is “self-insuring” small losses, they will have a higher incentive to apply loss prevention techniques.  For example a homeowner with a higher deductible policy is more likely to install a burglar alarm to prevent a burglary in the first place.

My own perspective on this subject is that insureds should take the highest possible deductible that they can comfortably pay in the event of a loss.  Everytime an insured absorbs (i.e. pays) small losses below the dedutible, the loss does not get reported and there is no record of a claim to affect future premiums. 

However, many folks prefer a lower deductible – sleep insurance. They don’t mind a somewhat higher upfront premium for the peace of mind that regardless of the type of loss their out-of-pocket cost is manageable. That is why I mentioned above that the best deductible is the highest amount the insured can absorb comfortably (emphasis on “comfortably”). In reality however it is also known that many small losses are not reported even on policies with low deductibles. People and businesses tend to take care of a small property damage by just fixing it, or replace an inexpensive personal item without reporting a claim. The time and effort needed to report a claim and follow up with the claims process is simply too much for the small insurance payment. So insurance carriers make a higher premium and get a free pass on claims, too.

The choices that each of us make in buying insurance are based on our own individual situation and can differ from person to person and from policy to policy. One may choose a lower deductible plan for health insurance and pick a high deductible homeowners insurance. Consult with your insurance agent and ask him/her to review all of your insurance policies to make sure you are buying enough insurance to protect you, your family and your business but that you are not over-buying insurance. Such a review may save several hundereds of dollars a year by adjusting policy types, limits and deductibles.

Call Pacific Way at 909-599-1972 or email me at roobik@pacificway.net to discuss your specific insurance needs.