What is Deductible Buy Down Insurance? A Basic Guide for Policyholders

Policyholders navigating the current world of property insurance must often feel like they are in a complex maze. This is especially true when it comes to understanding various policy terms, dealing with rising premiums, and multiple coverage options that are available. One such coverage option that has gained considerable attention is deductible buy down insurance because many insurers are now demanding high percentage deductibles.

What is Deductible Buy Down Insurance?

In simple terms, deductible buy down insurance is additional insurance coverage through a separate policy or endorsement, which lowers the amount of the deductible a policyholder would need to pay in the event of a claim. A deductible is the portion of a loss that you are responsible for covering before your insurance policy pays for a loss. For instance, if your property insurance has a $10,000 deductible, and you suffer a loss of $50,000, you would need to pay the first $10,000 as the deductible amount. Your insurance benefit would cover the remaining $40,000.

The primary purpose of this deductible buy down coverage is to reduce the financial burden in the event of a loss. High deductibles can be challenging to manage, especially if they come unexpectedly and at a time when savings are not available to pay for the full deductible amount. A policyholder can lower this upfront cost by opting for deductible buy down coverage, making it more manageable in times of distress.

A Commercial Example of Buy Down Deductible Coverage by Chubb

Chubb published an example of how deductible buy down insurance works with a commercial hotel:

When a catastrophe strikes, commercial property owners often find they’re facing extremely high deductibles — sometimes into the tens of millions of dollars. Chubb’s Hotel Deductible Buydown policy is designed to address this exposure. Available as either standalone or follow form coverage, the Hotel Deductible Buydown policy covers a large portion of an Insured’s deductible, with the potential to reduce it to a minimum of $100,000.

A policyholder insures a property valued at $200 million, agreeing to a standard market deductible of 5 percent. A large hurricane hits the area and the Insured is facing a $10 million deductible, a significant impact to any organization’s bottom line. With Chubb’s Hotel Deductible Buydown coverage, the deductible could be reduced to $100,000 — saving the organization $9.9 million in losses.

Deciding whether to purchase this coverage requires careful consideration. Here are some factors to consider:

Financial Preparedness: Assess your ability to pay the standard deductible in the event of a loss. If paying a high deductible would be financially straining, buy down coverage might be a wise choice. The basic question to ask is, where is the money going to come from to repair the property? Savings is one source. If that is not available, do you have enough creditworthiness to obtain a loan for the deductible?

Risk Assessment: Consider the likelihood of a claim. If you live in an area prone to natural disasters or other risks, the chances of needing to pay a deductible are higher. Many insurers are placing higher deductibles for certain risks like hurricanes, wildfires, hail, and earthquakes in areas prone to those risks.

Cost vs. Benefit: Analyze the cost of the additional premium against the benefit of a lower deductible. While it means paying more upfront, it could save you significantly in the event of a claim.

Peace of Mind: Sometimes, the decision isn’t just financial but also emotional. If having a lower deductible offers you peace of mind, it might be worth the extra cost.

When considering deductible buy down coverage, it’s crucial to have a clear understanding of what you’re opting for. You must involve your insurance agent and ask questions about this coverage option whenever there is a high dollar or percentage deductible. Agents suggest that this coverage be considered and analyzed.

For example, I was on a panel of insurance agents discussing issues facing policyholders, as noted in Insurance Agents Play An Important Role In Everyday Life:

I was asked to share a top five items which Florida insurance agents should be concerned about regarding errors and omissions, and I listed the following:

…

Condominiums and Apartments—sell the insurance required in the by-laws or financing agreements. Every condo has a set of bylaws which explicitly explain what needs to be purchased and items are often not covered because they are excluded property, or the risk excluded such as wind driven rain. Apartments are usually financed, and the finance agreements usually require certain insurance amounts—and sometimes on such things as mold. Ask for by laws and insure to bylaws. Ask for financing agreements and sell at least to what is required. Deductible buy down insurance should be suggested to all condos if there are large deductibles. Watch for enough Law and Ordinance Coverage for these large structures older than 20 years—the building codes have changed a lot and create large gaps for older buildings.

Condominium Associations with large percentage deductibles should always consider deductible buy down coverage because the by-laws may not allow the risk and expense of large deductibles, which result in large individual assessments.

Other questions to ask your insurance agent about buy down deductible coverage:

How Much Will My Deductible Be Reduced?: Understand the exact amount by which your deductible will be lowered.

What Will Be the Increase in My Premium?: Ask for a clear figure or percentage increase in your premium.