Preferred Financial Group

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"What’s The Relationship Between Deductible Amount And Annual Premium?"


If you are willing to accept responsibility for a larger amount of a potential claim, the insurance company will reward you by decreasing your cost of insurance with a lower annual premium. The example below illustrates annual premium differentials based on the insured’s willingness and ability to accept deductible limits of $500, $1,000 & $2,500. The annual premiums are shown for each scenario, as well as the cost differential for the increased deductibles as they relate to the most expensive coverage.


By increasing your deductible from $500 to $2,500, you can reduce your annual premium by approximately 1/3rd. This savings is substantial, particularly when you think of insurance as a way to protect against catastrophic losses, as opposed to minor losses. It’s as though the insurance company is giving you $421 a year just to assume a bit more responsibility for an event that may never occur. Here are a few thoughts on how you might use the savings of $421:

          • It would be enough to purchase an umbrella policy.
          • It could be used to purchase a decreasing term insurance policy designed to pay off your mortgage in the event of an untimely death.
          • It could be applied to your regular monthly mortgage payment, thereby reducing the remaining term of your mortgage payoff.
          • It could be used for enhancing your investment portfolio, including retirement planning…FYI— Did you know that investing $421 per year ($35.08 per month), with an annualized return of 6%, will grow to $16,209.93 at the end of 20 years?