Voluntary deductibles are a very commonly used instrument to reduce the payable premiums of a policyholder. Simply put, a voluntary deductible is a pre-specified amount that the insured agrees to pay from his own pocket in case of any unfortunate event.
The idea of paying out of your own pocket to save on the premium amount seems to be very confusing. Is it the correct choice? You will find the answer to this question as you delve deeper into this article.
What is a Voluntary Deductible?
Let us try to understand the concept of voluntary deductibles in further detail through an example -
Let us assume that the cost of damage is equal to INR2500 and you have opted for a voluntary deductible of INR 1000 under your car insurance policy. This means that you will have to pay INR 1000 well in advance towards the repair of your car. Any amount beyond INR 1000, which is INR 1500 in this case, will be covered by the insurance provider.
You must note that the insurance provider will only cover an amount less than the sum assured of your car insurance policy. This amount that you pay as the voluntary deductible is subtracted from the premium while calculating.
Let us now understand the details of how voluntary deductibles work for car insurance.
How do Voluntary Deductibles Work?
The following table clearly establishes the relationship between the voluntary deductibles and the premium payable by the insured –
| Amount of voluntary deductible | Discount on percentage of premium paid |
|---|---|
| INR 2500 | 20% on the own damage premium but subject to a maximum amount of INR750 |
| INR 5000 | 25% on the own damage premium but subject to a maximum amount of INR1500 |
| INR 7500 | 30% on the own damage premium but subject to a maximum amount of INR2000 |
| INR 15000 | 35% on the own damage premium but subject to a maximum amount of INR2500 |
Now, let us dive deeper into how the amount of claim pay-out is calculated. E.g., an individual who has a car with an engine capacity of 1000 cc and has chosen a voluntary deductible of INR5000. He had a minor accident. The cost of repair is INR15,000. In such a case, the insurance provider is obliged by the following equations to make the pay-out to the car owner.
| (A) Total claim | INR 15000 |
| (B) Deduction for consumable parts and components | INR 3000 |
| (C) Compulsory deductible amount | INR 1000 |
| (D) Voluntary deductible amount | INR 5000 |
| (E) Payable claim(A – (B+C+D)) | INR 7000 |
Through this illustration, we see that more than half of the cost is borne by the car owner.
Who Should Opt for Voluntary Deductibles?
Choosing a voluntary deductible would positively affect a more confident road driver than a reckless one. By paying the price upfront, he is entitled to benefit from a reduced premium, which could help him save more in the long run. If you are a new driver, opting for voluntary deductibles is not advisable.
Common Myths About Voluntary Deductibles
Unwanted investments: Some people assume that voluntary deductibles are wasteful expenditures. For a confident and trained driver, voluntary deductibles will help save a lot more. Hence, it's not an unnecessary investment.
Co-pay versus Voluntary deductibles: Between co-pay and voluntary deductions, it should be remembered that the distinction is in the manner in which the owner of the car makes the payment. The policyholder pays the optional deductible first when making a car insurance claim. After this has been done, the insurer shall settle the remaining amount. In the case of co-payment, the final claim shall be shared between the insurer and the policyholder according to the percentage decided in the policy.
Not the same as No-Claim Bonus: If the policyholder makes no claims, the insurer rewards him with a reduced premium under the NCB benefit. On the other hand, if you do not have a voluntary deductible case, you will not earn any more discounts on your premium.
Final Thoughts
Voluntary deductibles can be thought of as a double-edged sword. For a well-conditioned driver, voluntary deductibles can result in hefty savings due to the reduced premium amount.
On the other hand, for new or rash drivers, voluntary deductibles can prove to be much more costly than paying a higher premium throughout the course of the policy.
Having gone through all the basic advantages and disadvantages of opting for voluntary deductibles, it is imperative to say that there is no thumb rule for whether you should opt for them and it totally depends on your discretion.
