Insurance Deductibles Made Easy
2016-05-19 13:25:00 UTC
What is a deductible?
All insurance policies carry an excess or deductible, which is the amount you agree to pay out-of-pocket i.e. on your own in the event of a claim before your insurance benefit kicks in. Your insurance company picks up the rest of the bill.
What are the types of deductibles or excess?
The deductible or excess has two components: the compulsory excess, and the voluntary excess. Co-payment is another common option in health insurance.
As the name implies, compulsory excess or deductible is the fixed sum of amount that the claimant has to pay on his own in the event of a claim. For example in motor insurance, the compulsory deductible for cars is ₹ 1000 for cars less than 1500 cc and ₹2000 for cars greater than 1500 cc respectively. Similarly, for two wheelers the amount is ₹ 100. It is fixed and non-negotiable.
Voluntary excess or deductible is the amount you voluntarily agree to pay out-of-pocket in the event of a claim in addition to the compulsory excess or deductible in order to lower your insurance premium.
How increased deductibles affect your OD premium
Co-payment is different from Deductibles or excess and is mainly used in health insurance. Co-payment is a preset percentage of a claim that the insured agrees to pay while a deductible is a fixed amount of money that is paid by the insured in the event of a claim. In both cases, the plan will pay the rest of the bill. For example, if you visit a doctor, you might pay a flat ₹ 200 and the plan will pay the rest of the bill or if you have outpatient surgery, the plan might pay 90% of the bill and you will pay the other 10% depending on your policy terms.
How deductibles work
Insurers often use deductibles as a deterrent to discourage the insured from making a trivial or improper claim as a fraction of the cost is borne by the claimant. Usually, it is a delicate balancing act between excess and policy premium. In short, the higher the deductible you choose, the lower your insurance premium, because the higher deductible forces you to be more responsible than otherwise, at least that is the theory or logic.
For instance, if your total claim amount is ₹ 10,000 and you agree to pay ₹ 3,000 of your claim as voluntary deductible in addition to say a compulsory deductible of 2,000, then the insurer would pay only ₹ 5,000.
As seen from the above example, in general, the idea of deductibles is beneficial to both parties as the insurer passes on part of what he saves on low value claims as premium discounts to customers.
How to decide on your Policy excess or deductibles
You decide the amount of your voluntary excess and this is what it means in general; the higher the voluntary excess, the lower the insurance premium. However, be careful! Remember that you must pay the deductible from your pocket in the event of a claim and therefore it is important that you set your deductibles to an amount that you can comfortably afford.
The following are some of the important considerations in deciding on deductibles:
If your bank account generally has a few thousand extra rupees in it that you can dip into in times of need, then a higher deductible might be a good option. However, if your bank balance is lean, or if your money is tied up in investments, then having a large deductible may be monetarily taxing. The thought of paying a deductible after submitting a claim should not give you sleepless nights, so ensure that you set your deductible to an amount you can comfortably pay at any time of the year.
This question may not apply in all scenarios and may be more relevant in motor insurance. The value of your car for the most part comes into the equation especially when the car in question is an older car that can make deciding on excess a bit complicated. In fact, depending on the value or the age of your older car you may want to reconsider having comprehensive policy coverage at all.
Let us say you have an older vehicle that is valued at ₹ 20,000. Having comprehensive coverage with ₹ 5,000 deductibles (compulsory and voluntary excess together) means the maximum payout should you need to submit a claim will be ₹ 15,000. Is the coverage worth it given the extra premium you will pay? It is a balancing act and an individual choice but it is something you need to think about.
However, the above example does not apply to all situations. If you are healthy and hardly use any health care in a year, you should not lose sleep over a health insurance plan excess, as the deductible is only a small fraction of a potential claim, which can be many times larger. Secondly, the real value of health insurance is the security it provides you against serious sickness or unforeseen medical expenses due to an accident, etc. The same logic holds good for home insurance or overseas travel insurance.
No Claim record
Often car owners prefer lower excess, so their out-of-pocket expenses are minimal at the time of a claim. They plan for the worst-case scenario. However, if you have not submitted a claim in the last 4 to 5 years, and have enough cash to pay any deductible, a higher deductible helps to lower premiums and will save money in the long term.
If you have two cars in the family and one of them is sparingly used, it makes sense to agree a higher voluntary excess to reduce insurance premium as the probability of a claim is very low.
So, in conclusion, choosing your policy deductibles is important, and requires careful deliberation. Hopefully this post makes that decision easier for you; if you feel we have missed out on something, please feel free to comment and let us know!