Motor Insurance - Deductibles

Imagine that your employer provides you a brand new laptop when you join. However the company’s policy says that in case the laptop is lost or stolen, you will need to pay 15% of the original laptop cost. Many employers do this to drive ownership with employees.

The 15% you would be required to pay in case of theft in insurance parlance is called a ‘deductible’.

A deductible is an amount that you must pay from your end before the insurance company starts to pay for the claim settlement. The insurance company is only liable for the payment of claims exceeding the deductible amount.

Almost all types of insurance plans come with deductibles.

For instance, if you’ve bought a brand new phone and you drop it accidentally, incurring a repair cost of Rs 5000. The insurance plan you’ve purchased for it says that you need to pay 10% of the repair costs as a ‘deductible’ - which in this case will be Rs 1000. So, you will pay Rs 1000 towards the repair cost and the insurer will pay the remaining Rs 4000.

Likewise, Motor Insurance policies come with Deductibles too. They are a way of ensuring that you are actively taking care of the asset, involved in the losses, and hence there won’t be any frivolous claims. They have a great impact on claim settlement, because you are responsible for paying a certain amount before the insurer steps in.

How do Deductibles work?

A Deductible comes into play only when you file a claim. The claim amount is divided into two parts - the deductible, which you have to pay and the amount excluding the deductible, which is borne by the insurer.

Types of Deductibles

There are basically two types of deductibles

  • Compulsory Deductible
  • Voluntary Deductible

What is a Compulsory Deductible?

A compulsory deductible is a mandatory provision in a motor insurance policy, as declared by the Insurance Regulatory Development Authority of India (IRDAI).

A compulsory deductible will not affect your premium since the premium is based on your car's model, year of manufacture, and approximate market value, or Insured Declared Value (IDV).

The amount is fixed by the motor insurance company in accordance with IRDAI guidelines. Regardless of the amount of the claim, this deductible is fixed. When determining the deductible, the vehicle's engine capacity is taken into account.

IRDAI regulations state different deductibles for different types of vehicles -

  • Below 1500 CC Four-wheelers - Rs 1000
  • Above 1500 CC Four-wheelers - Rs 2000
  • Two-wheelers - Rs 100

For instance,

Ram holds a car insurance policy of Rs 2 Lakhs IDV. His car parts got damaged in an accident, and hence he raised a claim that accounts for Rs 10,000. The compulsory deductible, in this case, is Rs 2000 as his car's CC is more than 1500. So, Ram will pay Rs 2000 along with consumable charges. The insurance company will pay the remaining 8,000 for the raised claim.

Since this example is for explanation purposes, we haven’t factored in the depreciation and consumables amount.

What is a Voluntary Deductible?

As the term implies, a voluntary deductible is an optional amount that you can choose to spend from your end. You need to pay this amount before the insurer steps in to pay the rest of the claim amount. A voluntary deductible in your car insurance policy will lower your premium. However, you'll pay more money from your pocket during a claim. You will be responsible for paying voluntary deductible on top of the compulsory deductible when you choose this option. Here is a table showing the discount of premiums on various voluntary deductibles -

Voluntary deductible amount Discount on premium
₹2,500 20% on the own damage premium, limited to ₹750.
₹5,000 25% on the own damage premium, limited to ₹1,500.
₹7,500

30% on the own damage premium, limited to ₹2,000
₹15,000

35% of the own damage premium, limited to ₹2,500

In an attempt to lower the premium, you may choose a higher deductible which in turn will lead to more expenses from your own pocket. Choosing a voluntary deductible depends on your comfort level and your readiness to assume a certain level of risk.

Note: The higher the deductible, the lower the premium

Let’s see how voluntarily deductible works taking the same example as above -

For instance,

Here, Ram has chosen Voluntary deductible as part of the Motor Insurance policy. The voluntary deductible chosen by him is Rs 5000 at policy inception. Some parts of his car were damaged in an accident, resulting in a claim for Rs 20,000. As per the following criteria, he needs to pay Rs 7000 out of his own pocket:

Rs 5000 (voluntary deductible) + Rs 2000 (compulsory deductible) = Rs 7000.

In this instance, the insurance company pays only Rs 13,000 for the raised claim.

Since this example is for explanation purposes, we haven’t factored in the depreciation and consumables amount.

How do Voluntary and Compulsory Deductibles differ?

In motor insurance, the following factors distinguish the compulsory and voluntary deductibles:

Voluntary deductible Compulsory deductible
It is not mandatory. The amount can be selected from the available voluntary deductible options. It is a mandatory requirement. The IRDAI sets the amount.
Voluntary deductibles are inversely proportional to the premiums. Hence, the higher the deductible, the lower the premium. The amount is fixed, and this does not affect the premiums.
When filing a claim, you must pay both voluntary and compulsory deductibles. Only the compulsory deductible amount needs to be paid during a claim.

Are Deductibles applicable in all types of Motor Insurance Policies?

No, it depends on the type of coverage offered by the Motor Insurance Policy.

How? Let's see -

  • Third-party insurance basically takes care of the financial losses resulting from the damages caused to the third party by you during an accident. In this type of insurance, deductibles are not applicable since losses to your vehicle are not covered.
  • Comprehensive insurance helps you recover from loss incurred due to total loss, theft, and damage to your vehicle in case of an accident. Because this policy covers the costs associated with damages to your vehicle, both optional and compulsory deductibles are applicable.

It is up to you whether to go with only the Compulsory Deductible or choose a Voluntary Deductible as well. For instance, you can opt for the voluntary deductible in case you have a lavish car. The premium will be higher if you own a high-value car. In order to be able to pay a lower premium for your insurance coverage, you can consider a voluntary deductible.

The purpose of this feature is to ensure that you will be diligent when making a claim. As a result, it dramatically decreases the frequency and size of claims. A deductible factor also emphasises the importance of maintaining a vehicle's safety, thereby safeguarding you and your vehicle.

Have Questions about Car Insurance?

Have Questions about Car Insurance?

Insurance would be much easier for you after browsing the list below.

In order to file a car insurance claim, you will need to provide your policy number, the name of the driver, the date and location of the accident, and a description of the damages. You should also have your driver's license, registration, and proof of insurance available.

In your claim, you will need to provide a description of what happened in the accident. This should include the date, time, and location of the accident, as well as a description of the damages to your car.

Liability insurance covers other people’s injury and damage to their property in an accident.

If you don't have car insurance and are involved in an accident, you could be held liable for any damages caused. You could also face fines and penalties as per your state law.

The best way to save money on car insurance is to explore online and compare rates from different insurers. You can also choose to increase your deductible or opt for lower coverage levels.

Collision insurance covers damages to your car in the event of an accident. It typically costs more than liability insurance, but it can be worth it if you have a newer car.

Comprehensive insurance covers damages to your car that are incurred due to activities like theft or vandalism and not by accidents. It typically costs more than collision insurance, but it can be worth it if you live in a high-crime area.

Comprehensive insurance covers damages to your car that are incurred due to activities like theft or vandalism and not by accidents. It typically costs more than collision insurance, but it can be worth it if you live in a high-crime area.

Uninsured motorist coverage protects you in the event that you are involved in an accident with a driver who does not have insurance. Underinsured motorist coverage protects you in the event that the other driver does have insurance, but their policy does not cover all of the damages.

Well, the choice is yours. Suppose you want to secure your financial condition or do not want your policy to lapse due to non-payment of the premium (which may occur due to several reasons). In that case, you must buy a rider at the time of purchasing a policy.

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