The Understanding of Business Insurance Deductible

Susan Kelly

Dec 09, 2021

Choosing your deductible is one of the most important decisions you'll make as a business owner. You have to balance several factors as a small business owner, including your risk factor, your out-of-pocket costs, and your cash flow.

Setting a deductible for your business insurance is a way to pay for every claim you make. Your insurance policy specifies how much the deductible should be. For instance, if you have commercial property insurance, the deductible might be $500. A claim under that policy will cost $2,000; you will pay $500, while your insurance provider will cover $1,500.

The deductible makes it possible for you and your insurance provider to share risks. Thus, insurance companies can keep premiums affordable by limiting the number of small claims they have to pay.

Business interruption insurance: If your property is damaged severely and your business needs to close for a period to repair or relocate, this coverage provides you with financial assistance. The most common form of business insurance is called a Business Owners Policy (BOP), which covers general liability, property, and business interruption.

Insurance Deductible Types

Percentage Deductible: The policyholder sets aside a percentage of the property's value as a deductible.

Waiting Period Deductible: This normally relates to business interruption insurance. In order to qualify for payments, a small business must be inoperative for a certain period.

Flat Deductible: Deductibles of this type are the most common. No matter how much you lose, you pay the same amount.

How do insurance deductibles work?

Insurance deductibles are amounts that the insured person is responsible for paying upfront before the policy kicks in. In the event of a loss, such as the damage caused to your business vehicle following an accident, insurance adjusters will investigate the incident. In this process, the cost of repairing the damaged car is also determined.

Your deductible comes into play here. The adjuster estimated damages of $5,000 and the deductible on your commercial auto insurance policy is $500, so you'll be responsible for the first $500 of your claim, and your insurer will cover the remaining $4,500.

Whenever you file an insurance claim, the insurance adjuster assesses the losses you sustained and what you are owed for repairing or replacing the items or property.

Determine the deductible you can afford

A small business' cash flow must be considered when calculating a deductible. A policy may have a tier system of choices for deductibles or be negotiated depending on the coverage. Typically, the lower the deductible, the more affordable the premiums.

An example would be $1,850 in premiums for a policy with a $1,000 deductible. However, when the deductible is $2,500, the annual premium drops to $1,060.

It is necessary to determine the exposure and risk for each policy your business has in place or may need. For your business, a lower premium and a higher deductible may be the right approach, depending on the risk and type of policy.

However, lower deductibles and higher premiums may be justified in some cases due to higher risks. Ensure a claim won't jeopardize the business's financial solvency by reviewing the risk. Speak to an insurance professional about selecting the maximum coverage at an affordable cost.

Individual claims and aggregate claims are also possible ways to determine property insurance deductibles. Smaller companies will typically benefit from the individual claim basis if they have fewer claims. The aggregate basis may be prudent if your organization or industry experiences a high number of claims each year.

Does the Deductible impact the Insurance Costs of Small Businesses?

Both the deductible on your small business insurance policy and your premium (the amount you pay each month or annually for the policy) can have a substantial impact on the amount you pay. You will pay a higher premium if your deductible is lower. The opposite is also true: A higher deductible leads to lower premiums. When a deductible is higher, it is important to be prepared to cover the amount in case an incident occurs.

Which types of business insurance are not deductible?

Business insurance premiums cannot always be deducted as a business expense. The IRS won't consider the insurance policy you want to write off as a business expense unless it is an ordinary and necessary expense.

A policy that covers earnings lost by a person who has a sickness or disability or a life insurance policy cannot usually be written off as a deduction. You won't be allowed to deduct the cost of setting up a self-insured reserve as a business expense, either. Paying for policies that help secure a loan cannot also be deducted.

The Bottom Line

Tax professionals can help you determine how much revenue your business generated and how much you owe in taxes when it comes time to review your finances. Depending on how much you were paying for data breach insurance premiums, a tax professional can tell you whether or not you can write them off as a business expense.

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