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Voluntary and Compulsory Excess- Save money now or avoid later risk?

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Published on December 5, 2020. EST READ TIME: 4 MIN

Getting a motor insurance is a very customizable process and by selecting a few options at the time of purchase of your policy, you can either get a discount on premium now or pay forward for some expenses, which would have otherwise been charged at the time of a claim. This is done through voluntary and compulsory excess components in your car insurance. You may have come across the term ‘co-pay’ or ‘deductible', all of these are the same.

Different types of excess insurance

There are two different types of excess insurance to be considered for people who are buying car insurance:

• Compulsory Excess:  Everyone has to pay for this regulator-mandated component of the car insurance policy. There is no way to escape this and no discounts are involved in it. The main reason behind this is to make the policyholder act responsibly by imposing a mandatory cost on them.

• Voluntary Excess: This is a buyer-chosen component where the insurance company allows you to bear a certain component of your own risk and reduces your premium amount in exchange. If you think you will not be driving too much and that you are a confident driver with sparse claims in driving history, you may choose this option.

The working model of voluntary excess:

Every insurance company will only pay a set amount of the claim with you as the policyholder being required to pay the rest. However, when you buy car insurance online, you are given the option to choose a voluntary excess or deductible. If you choose this option, you will get an instant discount on your premium, but will be required to pay a higher deductible or a ‘voluntary excess’, if and when you make a claim. Consider this like taking an early advance on the fact that you are a responsible driver and will not damage or lose your car, leading to a claim. If you do make a claim, over and above the compulsory excess, you will have to pay a voluntary excess as well.

Advantages of opting for a voluntary deductible/voluntary excess

There are two main reasons why a voluntary excess is a great choice for people who are confident about their driving habits.

First is the obvious one. You get a significant discount on your own car insurance premium, which you can use to increase any other type of car insurance add-on cover, without actually changing the total amount cut from your bank account.

Second, if you are not confident, you can still take a lesser level of voluntary deductible. This means that even though you get a lower discount on the premium right now, if a claim is made, you will not have to shell out a considerably large amount of your money as the excess component.

Risks and disadvantages of opting for a voluntary deductible/voluntary excess

The fact of life is that, however, skilled one may be in their driving, accidents can and do happen.

Sometimes this instant discount factor may end up seeming like walking a tightrope for your entire insurance period. Just in case a claim occurs, the insurance company will not be able to financially support you to the extent where they would have otherwise done.

The second factor is that since your out of pocket payment for car repairs goes up, you will have to manage a larger amount of money from your own side. Keep in mind that the car insurance deductible works on percentage of claim amount basis, so your co-pay amount can get uncomfortably large in a hurry.

Why should you voluntarily opt for deductibles?

Many people might think that they are purchasing insurance to cover their risk and to them voluntary excess may seem like a confusing option. There are many reasons why voluntary excess is a good choice:

First, it saves you money instantly. Insurance prices for some high-end cars can go into many thousands of rupees and every rupee saved is a rupee earned.

Second, the fact that you have a higher voluntary deductible clause in your policy will make you drive more responsibly because of extra payment for claims involved.

Conclusion

All in all, while a novice driver may want to forego the voluntary excess discount, an experienced driver with around 10 years or more of driving must take the benefit of this.

Disclaimer: The above information is for illustrative purpose only. For more details, please refer to policy wordings and prospectus before concluding the sales.

This blog has been written by

S. Gopalakrishnan | Motor Insurance Expert | 40+ years of experience in insurance industry

A veteran in insurance industry. S. Gopalakrishnan is a name to reckon with in the field of reinsurance, he has headed the Reinsurance department and has rich experience in other fields of motor insurance. He loves to share his opinion on latest topics in the insurance industry and how he can help people in safeguarding their assets using insurance products.

Mr. S.Gopalakrishnan recommends "HDFC ERGO for your vehicle insurance needs, it has always put customer’s interest at the forefront, with round the clock assistance to deal with emergency breakdown issues and hassle free claims process. You can be assured of complete and reliable guidance through the whole process."

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