Understanding Deductibles and How They Impact Your Insurance Premiums

If you are shopping for car insurance and home insurance in Kent or small business insurance in Ohio, there are plenty of factors to weigh when making a final decision on the policy that’s right for you. From coverage options to deductible and premium, there’s a lot to consider. When you work with the team of experienced agents at BK Insurance Financial, Inc., you can trust that the insurance products we suggest make sense for your situation and risk. Here’s what to know about how an insurance deductible is calculated and how it impacts your insurance premium.

What Is An Insurance Deductible?

The deductible is how much you are responsible to pay out of pocket toward a covered claim before your insurance company steps in and begins to pay for replacement or repair. For example, if you have a specific covered loss with a $10,000 limit, and a deductible of $1,000, then you would need to pay that amount before the insurance company will pay up to the remaining $9,000.

Deductibles vary, for many reasons. For instance, the type of insurance coverage makes a difference, since each type of policy–home insurance, auto insurance, small business insurance, renters insurance, etc.–could have its own unique deductible structure. Beyond the specific type, location can also impact your deductible, especially if the coverage is for property insurance and you’re in an area prone to certain natural disasters. For homeowner’s insurance, the value of your home and your property value can directly impact deductible options. Claim history, frequency of losses and other risk factors and individual exposures can also factor in. In general, higher risk equals a higher deductible.

What Is an Insurance Premium?

A premium is the amount that policyholders pay to maintain insurance coverage. Premiums can often be paid on a monthly, quarterly, or annual basis. Premiums are directly related to deductibles, and can be impacted by a wide range of factors, depending on the specific type of coverage. For instance, higher coverage limits or additional endorsements or riders mean more coverage which will naturally raise your premium. Claims history and the severity and frequency of past claims can point to a higher likelihood of future claims, which might also raise the premium. And just like is true with any coverage, location and associated risks–local crime and theft rates, weather-related risks, traffic density and more–will also have an effect on the final premium determination, along with how much it may cost to replace or repair property.

To put it simply, premiums are often based on risk, much like deductibles. If there is a higher risk associated with your policy, whether due to personal history, location or other factors, you can typically expect premiums to be higher. Credit scores can also enter into the equation, along with the work that a policy-holder puts in to maintain their property and take all possible safety precautions. When it comes to business insurance, occupational hazards and risks along with some aforementioned factors will be part of the final premium determination. At times it is possible to bundle policies–like auto and home or various business-related coverage options–to positively impact premiums.

How Deductibles and Premiums Work Together

Deductibles and premiums, in many cases, have an inverse relationship. So, for example, when a policyholder has a higher deductible, they typically have a lower premium. On the other hand, when the deductible is low, the premium tends to be higher. In the first scenario, the policyholder assumes more financial responsibility for a covered loss, which means that the insurer assumes less risk overall. But when the deductible is low and premium is high, this means that in the event of a loss, the insurance company will shoulder more financial responsibility and risk, thus the premium is higher. 

There is no "one-size-fits-all" answer or clear equation to help determine your deductible and premium–they are based on a myriad of unique factors that shift and change from person to person. But we can say that this specific relationship between deductibles and premiums is pretty clear and holds true for most folks. In the end, it’s all about risk and how an insurance company can equitably balance financial responsibility between all of its policyholders.

Factors to Consider When Choosing a Deductible

Since there’s a clear connection between a deductible and insurance premium, this brings up some important considerations when settling on a policy. Here are some key questions to ask yourself:

• Can you comfortably pay the deductible if a claim occurs?
• Would a higher premium strain your finances?
• How much financial responsibility are you comfortable assuming?
• How likely might you be to file smaller claims?

Someone who has ample resources and who isn’t exposed to high crime and theft rates, weather-related risks or occupational risks that could pose the potential for repeat claims may opt for a higher deductible, knowing that they will be financially fine should they have to pay out of pocket. Regardless of your own situation, once you take an honest look at your options and determine whether or not a lower or higher deductible will work for you, then you can work with our agents to find a policy best suited to your needs and risks.

Some mistakes to avoid when making this decision include:

• Choosing the lowest deductible automatically, as it can result in unnecessarily high premiums
• Choosing a deductible you can't afford, as it could create financial stress after a loss
• Not reviewing deductibles regularly, since financial situations change over time

Annual policy reviews ensure that you are always protected from risk, in every sense of the word. Our experienced agents are happy to review your coverage limits, deductibles, risk exposures and premiums and will offer helpful recommendations.

BK Insurance & Financial Is Your Source For Insurance in Kent, Ohio

Life is busy, and it takes all you have to get through each week–there’s little time or bandwidth left to worry about whether your insurance premium or deductible is best-suited to your risk exposure until a loss is staring you in the face. That’s our job, and we love doing it!

When you’re ready to find that just-right coverage for home insurance and auto insurance in Kent, or small business insurance in Ohio, it’s time to call BK Insurance & Financial, Inc. Our dedicated agents can help to explain deductible options, compare premium impacts, evaluate coverage needs, and identify potential gaps that demand attention. They’ll help you find a policy you can afford with coverage that you can’t afford to pass by. In the end, deductibles and premiums are closely connected, but they differ for everyone–contact us to learn more about your unique situation. It’s time to get and stay protected.