Purchasing car insurance is no simple matter for it requires considerable knowledge about the different insurance products that are available before making a decision.
One of the most important things that one must be equipped with in order to make a good, profitable decision is to have a complete understanding of the jargon/insurance terms that are used by the insurer in the policy document.
This is because these words can have a great impact on one’s purchase decision as well as experience in the future.
What are Deductibles?
Deductibles are provided for in policies to lower the incidence of claims, for instance, compulsory deductibles may discourage policyholders from raising small claims and may even nudge policyholders to develop a cautious driving habit.
Deductibles are the part of the claim amount that is not covered by the insurance company. The amount is predetermined and is solely paid by the policyholder. It is an out-of-pocket expenditure for the insured. The insured needs to pay this agreed amount before the policy kicks in itself.
Why are Deductibles Important?
Opting in for these deductibles are really beneficial to the policyholders as well as the car insurance company in the long run due to the following reasons –
- Selecting a higher deductible limit for both compulsory and voluntary deductibles will guarantee that the premium amounts reduce in the long run.
- It instils a sense of responsibility in handling one’s assets.
- Lower incidence of claims for the insurer.
- Discourages small claims from being made.
- Availability of attractive discounts for certain deductible limits.
Though one must keep in mind that the nature and frequency of the claims will also modify the kind of benefits that the policyholder will get despite having high deductible limits.
The Two Types of Deductibles
1. Compulsory deductible - Compulsory deductibles are fixed by the insurers and in the event of a claim, the amount needs to be compulsorily paid by the insurer.
This kind of deductible is enforced by the insurance company along with the legal backing of the Insurance Regulatory and Development Authority of India (IRDAI). This does not affect the premium rate in any circumstance.
Oftentimes car insurance companies label this as ‘mandatory excess’ to discourage customers from making small claims.
The rates for compulsory deductibles are fixed as follows –
| Engine capacity | Rate fixed |
|---|---|
| Cars up to 1500cc engine | INR 1000 |
| Cars beyond 1500cc engine | INR 2000 |
2. Voluntary deductible - Voluntary deductible, on the other hand, is the limit chosen by the policyholder to meet a part of the claim from one's pocket before raising the claim.
Increasing the quantum of voluntary deductible reduces the premium through discounts. Customer’s choice ranges from the basic voluntary deductible limit of INR 2500 to a sum of INR 15000 voluntary deductible amount to seek heavy discounts on car insurance prices. For example-Akash while buying his car insurance policy had also opted for a voluntary deductible. While doing so, his insurance premiums were reduced as voluntary deductibles offer discounts in premiums to the policyholders. The reason being, if Akash will raise a claim request in the future, he would also be paying a portion of the claim settlement amount from his pocket. Thus, his insurance company will only pay the remaining settlement amount hence a discount is given by the insurance company, he a policyholder opts for a voluntary deductible.
A few months later, he raised a claim request, his insurance company approved the request
Voluntary and compulsory deductibles need to be factored in with the change in policy and the change in the insurer. The quantum of deductible can be revised during the renewal of the policy also.
The Difference between Compulsory and Voluntary Deductibles in Car Insurance
| Basis | Compulsory deductible | Voluntary deductible |
|---|---|---|
| Who fixes the deductible limit? | It is fixed by the insurance company itself and there is no scope of negotiation for the same. There are standard rates based on the engine capacity. | The amount of voluntary deductible is decided by the policyholder. |
| Mandatory or not | It is mandatory to have the deductible accounted for. | The policyholder needs not to compulsory opt for this deductible in the insurance plan at all. |
| Effect on premium | The rate of the policyholder's compulsory deductible has no bearing on the premium amount that the policyholder has to pay. | There is an inverse relationship between the level of deductible and the premium rate. The lower the deductible limit, the higher is the premium that the policy holder has to pay. |
| Factors influencing quantum of deductible | The quantum of the deductible is influenced by three main factors – the Insured Declared Value (IDV), the make of the car and the model of the car. For example, the compulsory deductible is higher when the car is older or when the cubic capacity of the engine is higher. | The quantum of voluntary deductible is entirely the discretion of the policyholder and does not depend on any other external factor. |
Conclusion
If one is a cautious driver and has sufficient disposable income, he or she must opt for a higher voluntary deductible to save on the premium amounts, as the probability of making a claim is very low and one can divert the monies towards other productive activities.
But let this decision be an informed decision taken after weighing all the pros and cons of keeping the deductible limit at a certain range.
