Deductible: What is it and How Does it Work in Insurance?

Deductible introduction
Deductible in car insurance

What do you know about the deductible in car insurance? Everyone would like to purchase the best car insurance with maximum benefits and minimum premiums. Nowadays technology has made it easy to purchase insurance with few clicks.

But there are some insurance terminologies available which make us confuse at some time. The deductible is also among these terminologies. It was introduced in motor insurance with some purpose. It is a very helpful tool for policyholders and companies both.

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What is Deductible?

A deductible is also called excess. It is the amount that is paid by the policyholder at the time of the claim. Basically, if you have any deductible option then it means some of the risks have been transferred to you.

When you file any claim then you pay the deductible amount. In other words, it is the pre-determined amount of the claim. You need to pay this at the time of the claim. Some deductibles are optional and some are mandatory in car insurance.

What is the Need for Deductible?

It was introduced in car insurance with specific objectives. The purpose of this is to avoid unnecessary claims from policyholders. It also encourages people to have good driving habits and handle the car with responsibility. If people will drive their cars with care and responsibility then there will be less chance of accidents.

If the insurance company will deduct some amount as deductible from the final claim amount then you will avoid filing a small claim. Because you will pay the deductible amount from your pocket and you like to save money. So, you will not drive rough.

Type of Deductible in Car Insurance

There are two types of deductibles in car insurance. The first is fixed and not in your control to select. But the second is in your control and you can select according to your choice and budget.

1- Compulsory Deductible (CD)

It is the fixed amount that you need to pay at the time of claim. This amount is fixed when you purchase your car insurance. This amount is depending on the cubic capacity of your car.

If your car is below 1500 cc then the CD amount is Rs.1000. It means if you have any car below the cubic capacity of 1500 then you have to pay Rs.1000 mandatory. If your car is more than 1500 cc then the amount is Rs.2000. It means you have to pay Rs. 2000 at the time of claim as a compulsory amount.

Let’s have a better understanding with below example:

Suppose Mr. Shailendra purchases a comprehensive insurance policy Future Generali for his car. Mr. Shailendra has a Hyundai car with a cubic capacity of 1197. He was going somewhere but his car gets damaged in a road accident.

He filled the claim of Rs.20000. In this case insurance companies will pay the claim after the deduction of the compulsory deductible.

Total Claim amount filled by Mr. ShailendraRs. 20000
Cubic capacity is below 1500 cc. So compulsory deductible amountRs. 1000
The total payable claim amountRs. 19000 (20000 – 1000)
The example is just for understanding purpose

2- Voluntary Deductible (VD)

As the name, suggests that you can select this according to your choice. Whether you select this or not is up to you only. It is not mandatory to select a VD in your car insurance policy. This is the over-and-above CD and the amount which you need to pay at the time of claim.

There are various options for voluntary deductibles and totally depending on which amount you select. It helps to reduce your premium. Your insurance premium gets reduced according to the amount you select. A high amount of deductible means a high reduction in premiums.

Let’s understand with an example

Suppose Mr. Saurabh has a Hyundai car of 1497 cc. He purchases his comprehensive car insurance policy with a voluntary deductible of Rs.2500. After some time he filled the claim of Rs.20000 because his car met in an accident.

Total claim amount filled by Mr. SaurabhRs. 20000
Deduction of the VD amountRs. 1000
Deduction of Voluntary amountRs. 2500
Total payable claim amount after deductionRs. 16500 (Rs.20000 – Rs.3500)

Who Should buy Voluntary Deductible?

In my opinion, it is not for everyone. As I explained above that whenever you will claim from your insurer then you have to pay a compulsory deductible amount for each claim.

You will also pay a voluntary amount if you have opted for it also. This means if you have filed claim multiple times in a policy year then you have to pay the deductible multiple times.

In the below situation opting for it may be beneficial:

  • Experience driver – if you are an experienced driver means very little chance of a claim. In that case, you have very little chance to pay from your pocket.
  • Safe driving – If you are responsible and a good driver then also you have less chance of an accident. It means less chance of a claim.
  • Good No-Claim Bonus History – if you have a good amount of no-claim bonus then it shows that you are not filling a claim.

In the above scenario, you can select voluntary deductible because in these cases there is very little chance of a claim. So, you can opt for this option to reduce your premium.

Yes of course it is a very beneficial tool but totally depends on case to the case also. You should select the amount very wisely because ultimately if you file a claim then you have to pay the VD amount from your own pocket.

Avoid this deductible if you have multiple claims in history. You should also avoid it if you are living in an accident-prone area. However, you can reduce your car insurance premium by opting for it.

Conclusion

VD and CD both are very important parts of a car insurance policy. As you know you can have any control over CD but you can choose VD if it seems beneficial for you. However, you should think about it before selecting the option so that it gets beneficial and you don’t lose your premium so much.

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