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Premiums, Policy Limits, and Deductibles — What Are They?

Jonathan Selby - Founder Shield
Jonathan Selby

General Manager

There’s more to being an informed shopper than merely saving money on a superb deal. While shopping for commercial insurance, you’ll regularly come across three terms: premiums, policy limits, and deductibles. Knowing the definition of this insurance lingo can save you money and time as you search to protect your business. This post will lay out what these terms mean in addition to some real-life examples. Let’s dive in.

What Are Premiums?

All products and services available for purchase have some price tag. When it comes to your insurance policy, a premium is its price tag. In short, it’s the amount you pay for your insurance policy. 

Premiums are typically due monthly, quarterly, semiannually, or annually, depending on the arrangement you work out with your insurer. Plus, most insurance carriers offer discounts if you pay your premium once a year or simply pay the premium in full when you purchase the policy. 

A variety of factors influence how insurers calculate premiums, such as:

  • Business type
  • Valuation
  • Insurance history
  • Geographical location
  • Revenue
  • Loss-control program
  • Insurance policy
  • Coverage amount
  • Policy limits
  • Deductible amount
  • Additional coverage
  • Discounts

Your premium is one of the most crucial aspects of your entire insurance policy. Suppose you miss a payment. Your insurer likely offers what’s known as a “grace period” and will allow you a specific amount of extra time to pay it. Of course, some insurance companies charge late fees for premium payments that mosey past the due date — but paying it will keep your policy active. 

If you stop paying your premium altogether, for one reason or another, your policy will lapse. Once the policy expires due to no payment, your insurer will be forced to cancel it. Halting policy payments isn’t the best way to cancel a business insurance policy. This route leaves a lot of loose ends. 

To get the most affordable policy premium for your business, an excellent approach is to work with a seasoned insurance professional who will apply the most discounts. Plus, automatic deductions and insurance bundles often slice off some of the premium, too.

What Are Policy Limits?

When you pay your premiums on time to keep your policy active, it enables your policy to reimburse you for covered losses. However, there are limits to how much your insurer will pay out per incident or over a specific time frame. These policy limits are also known as caps or limits of liability. 

As mentioned, your policy limits impact the cost of your premium and determine how much the insurer will payout per loss. Not all policies approach policy limits the same way, either. Each policy has a unique way of limiting payouts. 

For example, two types of insurance coverage limits exist, which include:

  • Per-occurrence limits: The maximum amount of money your insurer will pay per-incident.
  • Aggregate limits: The maximum amount of money your insurer will pay for all claims for your policy period.

Usually, general liability and professional liability policies are impacted by policy limits the most — but this doesn’t exclude other coverage types. Remember, policy limits set a cap on payouts. However, the max amount can change depending on the kind of loss. 

One great example of this relates to workers’ compensation insurance. Employees are often compensated for medical bills and lost wages if they’ve undergone an injury at work. But the specific amount to be paid is up to that state’s Workers’ Compensation Board. Plus, the employer’s role in the incident might dictate limits, too. 

What Are Deductibles?

The main goal of having insurance is to manage risk more affordably and effectively. In other words, businesses attempt to spread the risk more broadly — in the form of risk-sharing — than merely taking the brunt of all the exposure. Your policy deductible plays a significant role in this risk management.

A deductible is the amount of out-of-pocket money you pay toward the loss before your insurance kicks in. Only after you reach your annual deductible will the insurer provide financial coverage.

Most insurance carriers offer a variety of deductible amounts, ranging from low to high. Business owners can save money on their premiums without sacrificing coverage by:

  • Bundling insurance policies
  • Practicing precautionary measures
  • Increasing the deductible 

Deductibles can help businesses to customize their insurance coverage to fit their needs. No matter if you’re willing to bank on a significant amount of vulnerability or if your budget calls for a particular amount, deductibles are flexible.

For example, opting for a lower deductible typically means stomaching a higher premium. On the flip side, however, choosing to pay more out of pocket per claim with a high-deductible policy often reduces your premium. 

Understanding the details of what coverage your company needs can be a confusing process. Founder Shield specializes in knowing the risks your industry faces to make sure you have adequate protection. Feel free to reach out to us, and we’ll walk you through the process of finding the right policy for you. 

Want to know more about small business insurance? Talk to us! You can contact us at ​info@foundershield.com​ or create an account ​here​ to get started on a quote.

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