Whether we insure our car, our home, our boat, our personal property or our business, there is a basic premise of insurance that underlies them all…..sharing in losses that occur to them. A more common term for loss-sharing is deductible. A deductible is the amount which must first be subtracted from the total damage that occurs and the remaining amount is the financial responsibility of the insurance company (at least up to the policy limit).
Deductibles serve a couple of very important objectives. First, deductibles allow insurance companies to save money by not having to respond to frequently occurring, minor losses. In other words, a million one-dollar losses still add up to a million dollars. Second, deductibles create an incentive for insurance consumers to make the effort to eliminate or mitigate losses. Deductibles, as used in property insurance, can come in different forms such as the following:
Disappearing Deductible – A disappearing deductible is a dollar amount deducted from the amount of loss which is reduced as the size of losses increase, finally disappearing entirely when a loss reaches a certain, specified figure.
Flat deductible – A set dollar amount that will be subtracted from each claim or loss. The given amount appears in the policy and it does not vary with each loss.
Franchise deductible - A provision that no loss is paid by the insurance company when the loss amount is less than an agreed amount called the franchise; but if the damage equals or exceeds the franchise, the company pays the entire amount.
Straight deductible – Another term for flat deductible.
Aggregate deductible - Under this deductible provision, an insured qualifies for an insurance payment only after all eligible, incurred losses during the policy year exceed the established deductible amount.
Percentage deductible – Also known as a participating deductible, it is a stated proportion of any loss that occurs, such as 5% or 10%.
Waiting Period – A given amount of time (usually in hours or days) that must pass after a covered loss occurs before any coverage takes effect.
Although not called a deductible, a coinsurance clause qualifies as one. The clause requires a property owner to maintain insurance at least equal to a stipulated percentage of the property's full (replacement) value at the time of loss. A formula is used to determine the amount of coverage the property owner is due when a loss occurs.
Regardless the form, deductibles are a valuable tool in keeping insurance both affordable and available.
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Source - ©The Rough Notes Company, Inc.