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A deductible is any expense in any insurance policy that the policyholder has to pay out of pocket before the insurer steps in to pay for the expenses. It is also used to describe any clause that is used as a policy payment limit. 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 amount is the amount that the insured agrees to pay out of his own pocket and the remaining amount is taken care of by the insurance company. This happens when a claim arises and the amount is pre-decided in the discussion between the insurance company and the insured.
To take an example of a claim, if the deductible in a car insurance policy is Rs 5,000, and a claim arises for Rs 15,000, the insurance company will pay Rs 10,000 after deducting Rs 5,000 from the insured.
Mandatory additional clause in car insurance is something that cannot be pre-determined by the insured. It is compulsorily deducted by the car insurance companies for every claim. The amount to be deducted is pre-decided depending on the type and condition of the car. Any claim arising is paid after the first deduction. If this type of clause is mandatory in a car insurance company, then the voluntary excess clause is purely an optional matter as anyway the amount is deducted from the pocket of the policy holder for each claim. Hence it is entirely up to the policy holder to take the voluntary option.
The advantage of opting for voluntary deductible even after the mandatory clause is invoked is that the premium paid gets reduced on the policy. The premium has a component called ‘Own Damage’ on which the discount is applicable. Higher the voluntary deductible clause amount, higher the exemption Insurance company are given to you at a premium. However, it is important to understand that even though the premium is reduced when you opt for the higher voluntary additional deductible, your out-of-pocket expense will also be higher if a claim arises. Hence it is better to choose an additional deductible clause that you can easily afford if a claim arises. The higher the deductible, the higher your outlay in the event of a claim, and this can put you in an uncomfortable position if it is not possible to withdraw a large amount at short notice.
A deductible and excess clause has its own advantages and disadvantages, both long term and short term, which should be kept in mind before deciding on it.
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