Definition
Franchise Deductible: A provision in an insurance policy that exempts the insurer from paying claims unless the loss exceeds a specified amount or percentage. If the claim amount surpasses this threshold, the insurer covers the entire loss.
Meaning
The franchise deductible operates under an ‘all or nothing’ principle. Unlike typical deductibles that simply subtract a portion from the claim payout, a franchise deductible requires the claim amount to surpass a defined limit before the insurer pays out, but once surpassed, the insurer covers the full amount, not just the excess.
Etymology
“Franchise” originates from Middle English via Old French “francier,” meaning to free, and ‘deductible’ derives from Latin “deducere”, which means to subtract. Together, they signify a freeing from the threshold, after which costs are fully covered.
Background
Franchise deductibles are common in marine insurance, business interruption policies, and certain health insurances. An appealing feature for policyholders is that once the franchise deductible value is exceeded, coverage is total and does not require further payments out of pocket.
Key Takeaways
- All or Nothing: Claims below the deductible aren’t covered; those above it are entirely covered.
- Usage: Prevalent in specific types of insurance including marine and business interruption insurance.
- Financial Impact: Offers full coverage once the deductible is crossed, representing a financial safeguard for substantial losses.
Differences and Similarities
Differences:
- Franchise vs. Regular Deductibles: Regular deductibles reduce the claim payout by a set amount, whereas franchise deductibles result in full coverage once the claim amount exceeds the deductible.
- Franchise Deductible vs. Disappearing Deductibles: A disappearing deductible gradually decreases over time without claims as opposed to the instant ‘full coverage’ trigger of the franchise deductible.
Similarities:
- Risk Management: Both types serve to manage risks and avoid frequent small claims.
- Financial Planning: Essential for financial strategies in both personal and commercial insurance policies.
Synonyms
- Threshold Deductible
- Zero-Balance Deductible (in some contexts)
Antonyms
- Regular Deductible
- Percentage Deductible
Related Terms
- Excess: The amount the insured pays out of pocket before the insurer pays the claim.
- Claim Payout: The amount of money the insurer provides when a loss occurs.
- Deductible: A specified amount subtracted from the claim amount before the insurer pays.
FAQs
What is a franchise deductible?
A franchise deductible is a deductible mechanism where only claims above a pre-determined threshold are covered in full by the insurer.
How is it different from a standard deductible?
It differs in that claims below the threshold are not covered, whereas any claim exceeding the deductible limit prompts full payment by the insurer.
Questions and Answers
When is it beneficial to choose a franchise deductible?
It’s beneficial in circumstances where the policyholder prefers comprehensive coverage for significant losses and is less concerned with minor claims.
Why do insurers offer franchise deductibles?
Insurers offer them to minimize administrative costs from small claims while maintaining coverage for disastrous events.
Exciting Facts
- Marine Origins: Historically, franchise deductibles were pivotal in marine insurance, balancing substantial maritime risks.
- Biz Interruption Policies: Frequently used in business interruption insurance, aiding companies in catastrophic circumstances.
Quotations
“Insurance is not just about life or property; it’s about peace of mind.” - Anonymous
Proverbs
“Better to have insurance and not need it, than need it and not have it.”
Humorous Sayings
“Insurance: It’s the only fight you don’t mind losing to make your savings win!”
Government Regulations
Many national regulations provide specifics on how franchise deductibles are applied and their limitations. For instance, regulatory bodies might set caps on maximum deductible amounts to safeguard policyholders’ interests.
Literature for Further Study
- “Principles of Insurance” by Robert E. Hoskin
- “Essentials of Risk Management” by Michael C. Shenkman
Quizzes
Authored by Daniel Foster. Published on October 5, 2023.
Expense joyously, invest securely, and may you always have fewer claims than peace!
