What are deductibles, limits and endorsements?
Sometimes it seems like insurance has a language all its own, with terminology that can be confusing. And while you don’t need to be ‘fluent’ in insurance-speak, there are some terms you should know. We’ll define some of them below.
What is an insurance deductible?
An insurance deductible (sometimes referred to as a retention) is the amount you have to pay for a claim before your insurance coverage kicks in. Suppose you have a $500 deductible, and a covered claim for $2,500. You would pay $500 (your deductible) and the insurance company would pay $2,000. The deductible generally applies to each claim.
Increasing your deductible can decrease your premium, saving you money on your policy payments. So, a policy with a $5,000 deductible will likely cost less than the same policy with a $500 deductible. If you’re willing to absorb more of the cost of a claim, the insurance company will pay less, so they’ll charge you less for your coverage.
What is an insurance limit?
A limit is the maximum amount an insurance company will pay out. There are usually two limits on each policy: an occurrence limit and an aggregate limit. The occurrence limit is the most that your insurance company will pay for a single claim. Some policies refer to this as an “each claim limit.” The aggregate limit is the total amount that will be paid out while the policy is active (usually for a year).
Suppose you have an insurance policy that has a $1,000,000 occurrence limit and a $2,000,000 aggregate limit. During one policy year, you have three covered claims. The first claim is for $750,000, which will be paid in its entirety, less any deductible or retention. The second claim is for $900,000. This one will also be paid completely, less the deductible. The third claim is for $500,000. For this claim, your policy will pay $350,000, because that brings the total (aggregate) amount of all the claims to the $2,000,000 policy limit.
Here’s another example using the same policy. If your first covered claim is for $1,500,000, the policy will pay $1,000,000 of it. If you then have a second covered claim for $750,000 within the same policy year, that would also be completely paid, since the total amount paid on both claims is still under the $2,000,000 aggregate limit.
As with deductibles, limits also may affect your premium. The higher your limits, the higher premium you will likely pay. So a policy with a $2,000,000 limit will generally be more expensive than the same policy with a $1,000,000 limit.
What is an insurance endorsement?
Not every business needs exactly the same insurance coverage. Rather than write an entirely new policy for every different situation, insurance companies offer endorsements, sometimes called riders. Endorsements add, modify, or remove coverage according to your specific situation.
Certain endorsements can be added or removed when you buy your policy, when you renew it, or during the term of the policy. Depending on the endorsement, your premium may be adjusted. For questions regarding an endorsement on your Hiscox policy, call us at 1-866-283-7545 to speak to a licensed agent.
If you come across other insurance terms that are unfamiliar, you may find their definitions in our Insurance Glossary.