Sometimes it makes
no sense to insure a small loss. Why? It could
easily be paid out of pocket and deducted from
your taxes. Besides, it can end up costing more
than your recovery. Policy writing and claim
adjustment costs make insuring small losses
uneconomical for both sides. Deductibles eliminate
small losses and save you premium dollars.
Deductibles also reduce
the chance that dishonest people would create
losses. If there was no cost to them, they would
be more likely to submit a fraudulent claim.
No one likes a deductible during a loss. But
that deductible may save you more premium dollars
than the amount of the deductible. Probably
the first one that comes to mind is for a car.
Those deductibles of a set number of dollars
are called straight deductibles.
There are three other
types of deductibles:
1. Aggregate.
Adds all losses up to a certain dollar amount.
After that, other losses for the policy year
are paid in full. That way a business knows
its maximum dollar loss for the year.
2. Franchise.
Below a certain dollar amount, you pay for a
loss. Above a certain dollar amount, the insurance
company pays. These deductibles are common in
ocean marine insurance where small losses from
dampness, pilferage, and similar perils are
common.
3. Disappearing.
Lives up to its name. When a loss is large enough,
there is no deductible.
Tip.
Save money! Increase your Deductibles!
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