Policy Deductible

The policy deductible is amount the seller must pay towards the first loss for which a claim is filed. The purpose of the deductible in any insurance policy is to share some of the risk of loss between the insured and the insurer. In most policies, the higher the deductible above the historical losses, the lower the premium. The reason for this relationship is simple. The insurance company is willing to charge less for the coverage if the insured is willing to take a higher percentage of the risk of loss. Therefore, if a seller is really only concerned about the possibility of a catastrophic loss, then they would probably want to have a large deductible.

In most credit insurance policies, the deductible isn't applied to the total policy limit but to the first loss (the first loss deductible). If a claim is made for a potential loss of $50,000 and the deductible is $40,000, then the insurance company will deduct the full $40,000 deductible before paying the claim. The insurance company will also take the co-insurance into account. If the co-insurance is 10% (risk coverage 90%), the net claim payment would be 90% of $10,000 or $9,000. Since the deductible is totally applied toward the first loss, if another claim is filed, the insurance company will pay based upon the percentage of risk coverage (90%) for the policy.