Business Insurance: Choosing Between Higher Excess and Higher Premium

What’s Best for Your Business?

When choosing an insurance policy, one of the most critical decisions is whether to have a higher excess or a higher premium. Both can significantly impact your financial situation in the event of a claim but in entirely different ways. Understanding the nuances of both options is essential for making an informed choice that aligns with your needs and circumstances.

Understanding Excess and Premium Payments

Before diving into the specifics of choosing between a higher excess or a higher premium, it’s crucial to understand what these terms mean. The excess, also known as a deductible, is the amount you agree to pay out-of-pocket when you make a claim before your insurance coverage kicks in. On the other hand, the premium is the amount you pay regularly (monthly, quarterly, or annually) to keep your insurance policy active.

The Case for a Higher Excess

Opting for a higher excess typically results in a lower premium. This means you’ll pay less to maintain your insurance coverage. This can be an attractive option for many people, especially if they have a good track record of few or no claims.

Scenario: Jane’s Choice for a Higher Excess

Jane, a small business owner, decides to increase the excess on her business insurance policy. Her logic is straightforward: she maintains her property well and has rarely had to make insurance claims in the past. When choosing a higher excess, Jane significantly reduces her annual premium, freeing up cash flow, which can be reinvested into her business.

However, in the event of a claim, she will need to pay more out-of-pocket claims. She has an emergency fund to cover this potential cost, so this approach works well due to her disciplined savings strategy and confidence in maintaining a low-risk environment.

The Case for a Higher Premium

On the flip side, opting for a higher premium means your regular payments will be higher, but your excess will be lower. This can be beneficial if you anticipate making claims more frequently or prefer the peace of mind knowing you won’t have large out-of-pocket costs when making a claim.

Scenario: Mark’s Preference for a Higher Premium

Mark, a small business owner, pays a higher premium on his business insurance. He prefers this option because it ensures his out-of-pocket expenses will be minimal if something unexpected happens, such as property damage, theft, or a liability claim. With tight cash flow and a budget that doesn’t allow for large, unexpected expenses, Mark finds comfort in knowing he won’t need to scramble for a large excess payment during an already stressful situation.

Mark’s strategy is particularly advantageous for businesses that may not have a substantial emergency fund or prefer predictable monthly expenses over potentially large, unexpected costs.

Factors to Consider

When deciding between a higher excess and a higher premium, several factors should influence your decision.

  • Financial Stability: Consider your current financial situation. Do you have enough savings to cover a high excess if you need to make a claim?
  • Risk Profile: Evaluate the likelihood of making a claim. A lower excess might be more suitable if you live in an area prone to natural disasters or have a higher risk of incidents.
  • Policy Details: Review the terms and conditions of your policy. Some policies might offer additional benefits or services that could influence your decision.
  • Budget Preferences: Determine whether you prefer lower monthly payments with the potential for higher out-of-pocket costs or higher monthly payments with lower excess.

Making an Informed Decision

Choosing between a higher excess and a higher premium is a personal decision that should align with your financial goals, risk tolerance, and lifestyle.

Consider Sarah, who is evaluating her options for business insurance. Sarah runs a delivery service in a busy city with a high rate of traffic accidents and has experienced a few minor incidents in the past. She calculates her budget and realises that she can comfortably afford a higher premium, which provides her with a lower excess. This decision gives her peace of mind, knowing she won’t face substantial out-of-pocket costs in the event of another accident involving her delivery vehicles.

Conversely, Tom, who operates a delivery service in a rural area with minimal traffic and has never had an accident, opts for a higher excess. His priority is to save on his monthly insurance payments, and he feels confident that his careful driving and lower traffic risk will minimise the need for claims.

Making the Best Choice for Your Needs

Ultimately, the decision comes down to what makes the most sense for your financial health and peace of mind. Contact Morgan Insurance Brokers today for personalised advice on choosing the best insurance coverage for your needs.