Deductible in Insurance

What is Deductible meaning in Insurance?

A deductible in insurance meaning, it is the amount of money that you, the policyholder, must pay out of pocket before your insurance company starts to cover expenses.

• Applies to Claims: The deductible is subtracted from your claim payout. You must pay this amount first.
• Types: Deductibles are common in health, auto (motor), home, and property insurance.

Deductible Example (Auto Insurance):

If you have a Rs. 1,000 deductible and your repair costs after an accident are Rs. 10,000:

• You pay Rs. 1,000
• Your insurer pays Rs. 9,000

Why deductibles exist?

• To reduce small or frequent claims
• To encourage responsible behaviour
• To keep premium costs lower

Types of Deductibles:

• Fixed Deductible: A specific amount the insured pays per claim. For example, if your deductible is Rs. 5,000 and your claim amount is Rs. 10,000, you pay Rs. 5,000 and the insurer pays Rs. 5,000.
• Percentage-Based Deductible: Often used in property insurance, this is a percentage of the insured value rather than the claim amount. For example, a 2% deductible on a Rs. 10 lakh insured home means you pay Rs. 20,000 before the insurer pays.
• Compulsory Deductible: Compulsory deductible meaning, A fixed deductible amount mandated by the insurer or regulator, such as the IRDAI’s compulsory deductible in motor insurance, which must be paid on every claim and cannot be waived or altered by the policyholder.
• Voluntary Deductible: An amount chosen by the policyholder to reduce premium costs, but which increases out-of-pocket expenses during claims.

Compulsory Deductible in Motor Insurance:

A compulsory deductible in bike insurance or car insurance is a mandatory amount that the policyholder must pay out of pocket when making a claim for damages to their vehicle. This deductible is fixed by the Insurance Regulatory and Development Authority of India (IRDAI) based on the engine capacity of the vehicle and is applicable to all insured vehicles regardless of the policyholder's choice.

How much is the compulsory deductible in Car Insurance?

Engine Capacity based:

• For cars with engine capacity up to 1500 cc, the compulsory deductible is Rs. 1,000.
• For cars with engine capacity above 1500 cc, the compulsory deductible is Rs. 2,000.

Please note the compulsory deductible does not affect the premium amount of the insurance policy. Insurers may increase the compulsory deductible for older vehicles due to higher risk and claim probability.

Voluntary Deductible vs Premium:

It is Leverage available for Insurance holders to reduce the premiums by wisely choosing the deductibles.

• Higher deductible = lower premiums, but more out-of-pocket if you file a claim
• Lower deductible = higher premiums, but less to pay if something happens

How to choose the right deductible amount?

While it depends purely on the individual. Few points to consider before finalising the deductible.

• Evaluate your Financial Cushion: Low on savings, better to go for low deductible.
• Understand your risk profile: high likelihood of filling a claim? then better to choose low deductible or no deductible
• Compare the premium savings: If the premium savings are more and you can recover the deductible say within 3 years. i.e. Reduction in premium * 3 years = Total deductible. Then it make sense to go for the deductible.
• Claim Frequency : If you drive rarely and safely. Better to go for higher deductible.

Summary:

A deductible is the policyholder’s share of the financial responsibility in an insurance claim, designed to balance risk and cost between the insured and insurer.

Regards,

Honvest Team.