Insurance companies allow customers to share a portion of the risk associated with the policy. Known as the “deductible” or “excess”, this is a pre-determined amount of the claim that would be borne by the insured. So, when a claim arises, the insured would pay up this deductible amount from his pocket and the balance would be taken care of by the insurance company.
For example: Let us assume you purchase a motor insurance policy with a pre-determined deductible amount of Rs. 3000. In case of a claim of Rs. 6,000, the insurance company would deduct Rs 3000(the excess or deductible) and settle the claim at Rs. 3000.
There are two types of deductibles – Compulsory & Voluntary.
Meaning of Compulsory Deductible
All policies come with a compulsory excess clause. Compulsory deductible or excess is that amount that is mandatorily deducted by insurance companies on each and every claim you make. So you don’t have much of a choice here. It is a fixed amount that depends on the type of vehicle. Claims are paid out only after deducting it.
- Compulsory Excess
- Mandatory to all
- Does not fetch you a discount
- Minimal amount from insured’s pocket
- Voluntary Excess
- Purely optional
- Discount on the basis of amount of deductible
- A higher amount in comparison to compulsory excess that an insured has to pay
Where compulsory excess is mandatory, voluntary excess is optional. You could opt for a voluntary excess, over and above the compulsory excess. It is a deductible that you are willing to bear voluntarily.
Why “voluntarily” opt for deductibles?
This is a question that would definitely arise in many minds. Why should one opt for a voluntary deductible when insurance companies already adhere to a compulsory one? Simple reason- voluntary deductibles reduce your premium on the policy. This discount is on the “Own Damage” part of your premium. The higher the voluntary deductible you opt for, the more is the discount you get on the premium. Compulsory deductibles do not give you any premium discounts.
High Deductibles Means High Out of Pocket Expense
Deductibles sure do play quite a role in reducing your premiums. But before you make your choice, you do need to be a bit cautious out here. Keep in mind the below mentioned points.
- You out have expenses out of your pocket. Thus, it makes sense, to opt for a deductible amount which you could easily afford at any point in time. A high deductible may well fetch you a discount, but it also means you would have to bear a large portion of the claim amount by yourself.
- Sudden expense and liquidity: Claims may be sudden. This may be a disadvantage for a large deductible as you would need to come up a high amount quickly, and liquidity may be a constraint.
Co-payment and Excess- Two Distinct Options
Deductible/excess are different from co-payments- another common option offered by insurers. Where co-payment is a pre-determined percentage of the claim that is borne by the insured, a deductible is a fixed amount of money that is paid by the insured. For example, in case of co-pay, there would be an agreed percentage such as 10%. If there is a claim of Rs. 10,000, then 10% would be paid by the insured i.e. Rs. 1000 would be paid by the insured and the rest by the insurer. Co-payments are more commonly offered in health insurance plans.
Opting for Deductible Should Stem From How Confident you are as a Driver
Settling on the right deductible may seem to be tough task. The easy way to decide on the amount of voluntary deductible is to look at your budget for motor insurance premiums and on your driving profile. These two aspects would serve as an indicator to decide on the deductible.