Balancing Risk and Expense through Insurance Deductibles and Premiums

[Ethan Ray]

Hello,

I've been reviewing my business expenses recently and have been exploring different ways to control my monthly expenditures. One area that caught my attention is insurance, specifically the trade-off between deductibles and premiums.

In my case, I've been a homeowner for the past five years and haven't had any claims that met my $2,000 deductible during that time. I have obtained two more investment multi-family properties in those 5 years which have not had claims either. While I understand that things do happen and when it does its quite nice to have the protection, I'm contemplating whether it's worth considering a higher deductible in order to reduce my monthly premiums. By doing so, I could potentially free up some funds that could be allocated elsewhere in the business but obviously have reservations at what level of risk I put myself in by doing so.

It's important to strike a balance between managing expenses and ensuring adequate risk mitigation. How do you personally approach this dilemma? Are there any specific factors or considerations you take into account when making this decision? Have any of you opted for a higher deductible to lower your premiums? If so, how did it work out for you? Did you find it financially beneficial, or did you regret it in hindsight? Alternatively, have you chosen a lower deductible, accepting the higher monthly premiums for greater peace of mind? Have you ever benefited from that? I'm interested in learning from your insights and experiences.

Any advice, or any personal anecdotes would be very helpful.

[Jeff Nash]

I think it is just a matter of personal choice and weighing the probability yourself.  In a place like Texas where I live there tends to be severe weather and frequent storms so raising your deductible for wind/hail to save on premium might not work out.  If you have a track history of little to no claims and the inherent risk is low then it might be worth running the numbers to see if a change is warranted.  As an agent I would just say be careful as luck would have it you’ll make a change and kick or cuss yourself out later!  @Stanley J Black might be worth chatting with as well to get some perspective.

[Richard F.]

Aloha,

I would mention a couple items that are easily overlooked: If you have any Condo/HOA properties, BE SURE you get annual Insurance Summaries from the Management. You need to be sure YOUR policy matches with the Association Master Policy with regard to the HOA Deductible amount. Due to increased claims, many of those deductibles that had been only $5k - $10K, are now $25K - $50K. Your HO6 needs to cover that, or else YOU will!

The other option that is often overlooked, is coverage for "Ordnance of Law". If you have a major loss, this coverage will protect you from the costs of being required to bring a property or system "up to current code". This can save you a lot if you have an older property.

[Ethan Ray]

Thank you Jeff,

I appreciate your insight. I would expect that here in Alaska our biggest issues surround the seismic activity in the area, and the large quantities of snow that will destroy roofs/awnings or cause ice dams and subsequent water damage or mold in the house. I was thinking about reaching out to a local insurance agent to see if they would discuss with me the any statistics or observations regrading the majority of the claims in Anchorage. With this information I could better understand if those issues are something I can save for and stomach a large deductible for, or if its common enough(like places with hail damage) for me to justify keeping the lower deductible. 

[Ethan Ray]

Quote from @Richard F.:

Aloha,

I would mention a couple items that are easily overlooked: If you have any Condo/HOA properties, BE SURE you get annual Insurance Summaries from the Management. You need to be sure YOUR policy matches with the Association Master Policy with regard to the HOA Deductible amount. Due to increased claims, many of those deductibles that had been only $5k - $10K, are now $25K - $50K. Your HO6 needs to cover that, or else YOU will!

The other option that is often overlooked, is coverage for "Ordnance of Law". If you have a major loss, this coverage will protect you from the costs of being required to bring a property or system "up to current code". This can save you a lot if you have an older property.

 Thank you Richard!

We do not own any properties in an HOA(thank god), but I am interested in what you are referring to in Ordinance of Law coverage. I just want to make sure I understand as all my properties were built in the 70's. Is this generally wrapped up in my homeowners policy automatically and I just need to review to ensure? Or is this a separate coverage I will need to specifically add to my homeowners policy?

[Richard F.]

Typically a rider added to your policy.

Also, just a note based on your comment, your investment properties are presumably under a Landlord Policy, not a Homeowner Policy. These provide different coverage.

[Nick Barlow]

@Ethan Ray @scott trench mentions this in his book Set for Life, actually.

My wife and I haven’t altered deductibles like this, but we’ve also owned primary and rentals for 5/6 years like you have. For all our insurance claims we’ve had, they we’re all higher than $2000.

The foundation we repaired was a 5 figure number, and NOT an insurance claim.

It’s an interesting question-one I haven’t implemented. I personally would want the deductibles for at least 2 rentals available at the same time, so for me, the lower deductible makes sense emotionally.

[Scott Trench]

Quote from @Ethan Ray:

Hello,

I've been reviewing my business expenses recently and have been exploring different ways to control my monthly expenditures. One area that caught my attention is insurance, specifically the trade-off between deductibles and premiums.

In my case, I've been a homeowner for the past five years and haven't had any claims that met my $2,000 deductible during that time. I have obtained two more investment multi-family properties in those 5 years which have not had claims either. While I understand that things do happen and when it does its quite nice to have the protection, I'm contemplating whether it's worth considering a higher deductible in order to reduce my monthly premiums. By doing so, I could potentially free up some funds that could be allocated elsewhere in the business but obviously have reservations at what level of risk I put myself in by doing so.

It's important to strike a balance between managing expenses and ensuring adequate risk mitigation. How do you personally approach this dilemma? Are there any specific factors or considerations you take into account when making this decision? Have any of you opted for a higher deductible to lower your premiums? If so, how did it work out for you? Did you find it financially beneficial, or did you regret it in hindsight? Alternatively, have you chosen a lower deductible, accepting the higher monthly premiums for greater peace of mind? Have you ever benefited from that? I'm interested in learning from your insights and experiences.

Any advice, or any personal anecdotes would be very helpful.

I tend to bias heavily towards higher deductibles and lower premiums. I view insurance as truly a last resort for my life and business, and figure the insurer will always be better than me at calculating the risk. I buy insurance, and contribute to their profits to remove the possibility of catastrophic loss. I view everything else as an expense.