Everybody has heard the term deductible, but what does it really mean? How does it affect your policy and you, personally?
A deductible is defined by the Oxford English Dictionary as “a specified amount of money that the insured must pay before an insurance company will pay a claim.” Easy enough to understand, but what does that mean for you or your business?
For example, if you have a building insured for $200,000 and have a $2,500 deductible and suffer a total loss, the company will only pay $197,500; you would be responsible for the remaining $2,500 of the loss. Granted, that is a super simplistic explanation and there are a few different types of deductibles out there – flat, percentage, and diminishing (though this is less common).
A flat deductible is the same as the one in the example above. No matter what the amount of the coverage on the building (or vehicle, equipment, etc.), the amount you are responsible to pay will be $2,500. Most auto policies are going to have a flat deductibles on physical damage to the vehicle. Comprehensive (or “other than collision”) coverage will have a separate deductible from a collision deductible and they can be different amounts. Several companies will offer a $500 comprehensive deductible and a $1,000 collision deductible; this is because collision occurrences tend to be more damaging and the company will have to pay less for an accident.
A percentage deductible is most commonly seen on home and other property policies, as these are usually insured for a larger limit than a vehicle. For example, in the incident above, if instead of a $2,500 flat deductible, the company offers a 5% deductible. In the event of a total loss, the company would then pay out $190,000, leaving you to pay 5% of the loss ($10,000). Companies prefer this type of deductible as it increases based on the value of what is insured, helping them to mitigate costs of a potential loss.
This is the least common type of deductible out there and is mostly not offered. A few companies will use this type of deductible as an incentive to be accident free and promote company loyalty. This type of deductible will decrease each policy term you are without a claim and stay with the same company. It can even go as low as $0 if you are a safe driver for long enough!