January 29th, 2018
One of the most commonly employed tactics for reducing commercial insurance costs is carrying a high deductible. Choosing to assume more risk means you pay less in premiums. However, should disaster strike (and it will), you'll find yourself on the hook for a larger portion of repair and rebuilding expenses. So, how should you approach balancing your commercial insurance deductible with your premiums?
Use this handy starter guide to learn more about mitigating risk and setting an appropriate deductible.
Insurers evaluate some factors to determine an appropriate premium for businesses. These elements are known as rating exposures. Here are just a few of the factors they may include in their ratings, depending on the policy type:
- The square footage of your commercial space
- The type and quality of construction
- Whether you have sprinklers installed
- The fire protection classification
- The presence or absence of security systems
Essentially, insurance companies must first assess your risk level so they can assign a fitting premium and minimum deductible later.
After identifying rating exposures, carriers calculate premiums by multiplying their rate for coverage by the degree of determined exposure. The product of this multiplication is the annual premium, which is divided into 12 installments if you opt for monthly payments.
But wait—the cost of your policy is not quite set in stone. First, you have to set a deductible.
One of the most important factors to consider is your average cash flow. If yours will comfortably accommodate a large deductible without compromising your ability to meet other expenses, you're set. Assuming more risk will lower your monthly or annual payments.
On the other hand, some losses are tax deductible, while the amount of a premium you didn't pay isn't. In other words, you could be putting yourself at a tax disadvantage with a large deductible. Further, certain contractual obligations may limit the deductible amount you can carry.
How low or high you set your deductibles depends on your cash flow, property value, and more. It helps to compare commercial insurance policies to see what's out there. Explore your options with CoverHound—for free!