In any insurance policy, a deductible is any expense that the policy holder must pay out of his own pocket before the insurer steps up to pay the expenses. It is also used to describe any clauses that are used as a policy payment threshold. There are actually two types of such clauses in a car insurance policy, namely compulsory excess clause and voluntary excess clause.
The deductible or excess is an amount that the insured agrees to pay from his pocket with the balance being taken care of by the insurance company. This is in the event that any claim arises and the amount is determined beforehand in discussions between the insurance company and the insured.
To take an example of a claim, if the deductible in a car insurance policy is INR 5000, and a claim arises for INR 15,000, then the insurance company would pay INR 10,000 while deducting INR 5,000 from the insured.
The compulsory excess clause in car insurance is something that cannot be predetermined by the insured. This is deducted for every claim compulsorily by car insurance companies. The amount that is to be deducted is fixed beforehand depending on the type and condition of the car. Any claims that arise are paid after the deduction has been made first. If this type of clause is mandatory in a car insurance company, then the voluntary excess clause is entirely an optional matter as anyway an amount is deducted from the policy holder’s pocket for every claim. So taking a voluntary option is entirely up to the policy holder.
The advantage of opting for a voluntary deductible even after the compulsory clause has been evoked is that the premium paid is reduced on the policy. The premium has a part called ‘own damage’ on which the discount is applied. The more the voluntary deductible clause amount is, the more discount insurance companies give you on the premium. It is important to understand though, that even though the premiums are reduced when you opt for a high voluntary excess deductible, should any claim arise, then your out of pocket expense will also be higher. So it is better to choose an excess deductible clause that you can easily afford should any claim arise. The higher the deductible, the higher your expenses out of pocket will be should any claim arise, and if it is not possible to come up with a large amount at short notice, it could put you in an uncomfortable situation.
A deductible and excess clause has its pros and cons, both long term and short term, which should be taken into account before deciding on it.