Motor Insurance - Deductibles

Imagine that your employer provides you with a brand new laptop at the time of joining. 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% which 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 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 dropped it accidentally, incurring a repair cost of Rs. 5,000. The insurance plan which you’ve purchased for it says that you need to pay 10% of the repair cost as a ‘deductible’ - which in this case will be Rs. 1,000. So, you will pay Rs. 1,000 towards the repair cost and the insurer will pay the remaining Rs. 4,000.

Likewise, Motor Insurance policies car insurance policy come with deductibles too. Make sure 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.

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 it is based on your car's model, year of manufacturing, approximate market value, or Insured Declared Value (IDV).

The amount is fixed by the motor insurance company w.r.t. the IRDAI guidelines. Regardless of the claim amount, the compulsory 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. 1,000

• Above 1500 CC Four-wheelers – Rs. 2,000

• 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. 2,000 as his car's CC is more than 1500. So, Ram will pay Rs. 2,000 along with consumable charges. The insurance company will pay the remaining Rs. 8,000 for the claim raised.

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 amount. However, you'll need to pay more money from your pocket during a claim settlement. You will be responsible for paying a 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 -

In an attempt to lower the premium, you may choose a higher deductible which in turn will lead to more expenses from your 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. 5,000 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. 7,000 out of his pocket:

Rs. 5,000 (voluntary deductible) + Rs. 2,000 (compulsory deductible) = Rs. 7,000.

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

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

How Do Voluntary And Compulsory Deductibles Differ?

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

Are Deductibles Applicable For 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 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 damages incurred to your vehicle are not covered.
• Comprehensive insurance helps you recover from the 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 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 emphasizes the importance of maintaining a vehicle's safety along with your safety.