Definition of Deductible in Business Insurance

Commercial insurance terms and definitions. Learn more about business insurance terminology and get the right coverage for your business.

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A deductible is the amount of out-of-pocket money the insured pays to their firm before they take over. This is different from monthly payments that keep a policy active. There are some insurance types, home, and auto as examples, where insured individuals pay a monthly fee and a deductible for certain areas of coverage.

How It Works

Normally, policyholders choose the amount of deductible they want to pay before they sign an agreement with the insurer. What they select can determine how much they pay in monthly maintenance fees. Policies with lower deductibles tend to have higher payments. Individuals who chose higher deductibles end up making lower payments to keep the policy active.

Deductibles work differently depending on the industry. For instance, a person’s health insurance doesn’t start until they pay the designated deductible fees. This can be $500 for an individual and $1000 for a family. Once these out-of-pocket costs are complete the insurance company begins to help with payments.

This is different from auto and home insurance. With the former, the insured pays a portion of repair costs in the form of a deductible. On average, this ranges between $500 and $1000. However, instead of paying ahead of the repairs, they pay the auto shop the deductible at the time the vehicle is ready to pick up.

The same goes for a home insurance policy. Repairs due to hail, fire, or other situations aren’t held up until the deductible is paid. Rather, that amount is included in the final bill. The insured must have the funds available to pay the vendor so the insurance company can reimburse them the rest of the fees.

Deductible Caveat

There are ways to reduce the deductibles insured parties distribute. They select policies with lower rates of out-of-pocket payments. While this may seem like a good idea, there’s a caveat.

The less you decide to pay in deductibles the greater the amount in monthly bills. This helps the insurance company cover their expenses when payments have to be distributed to the health and repair industries. If the insured doesn’t have the money to pay the monthly maintenance fee, then there’s a risk they can be denied coverage.

How to Determine a Deductible Amount

The easiest way to determine an affordable deductible is to analyze the current situation. For instance, a newly built home might not need the same amount of repairs as one that is over 20-years-old. Thus, the insured might choose a higher deductible amount to maintain a lower monthly premium payment.

When it comes to auto insurance the deductible depends on the age of the vehicle. Those with older cars might want to increase their deductible so they make lower monthly payments. However, if they decide they want to keep their car for a long time, then they might consider dropping the deductible to something affordable. Even if it means paying a higher premium each month.

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