What is excess in insurance?

In the insurance world, your excess is the amount you pay out-of-pocket whenever you make an insurance claim. It’s a pre-determined sum listed in your insurance policy, designed to keep claims manageable and premiums affordable. Its major roles are to streamline the claims process by reducing the number of small, frivolous claims, and to distribute the cost burden for larger claims. This helps in maintaining stable premiums for everyone.

So while it may not be fun to fork out your hard-earned cash come claim time, your excess is an essential component of your insurance policy. So let’s dig a little deeper into the world of the insurance excess.

Why do insurance companies charge an excess?

Insurance companies add an excess charge as a way to add balance to the insurance ecosystem. It helps in a number of ways:

• Encourages responsible claims. If you know you’ll have to pay an excess at claim time, you’re less likely to make a claim for small issues. This helps reduce the overall number of claims, allowing insurers to focus on the more significant ones.

• Spreads risk. By paying an excess, your take on a share of the risk. This is a fundamental principle of insurance, ensuring that not all the burden falls on the insurer.

• Keeps the insurer stable. Having an excess in place prevents a situation where numerous small claims deplete the insurer's resources, a situation that could lead to higher premiums for everyone.

• Promotes careful behaviour. The prospect of paying an excess encourages people to be more careful, resulting in fewer claims overall.

In essence, excess charges help maintain a resilient and sustainable insurance industry, which is good for everyone involved.

Insurance excess example: how insurance excess works

Let’s look at two hypothetical scenarios that demonstrate how excess works and why it’s a useful tool:

Scenario 1: Major Claim

Imagine your car is damaged in a storm. According to your product disclosure statement (PDS), you're covered and successfully file a claim for $5,000 in repairs. Your policy has a $500 excess for storm damage. You pay this excess, contributing towards the first $500 of the repairs, and your insurer covers the rest, $4,500. This example shows how an insurance excess payment helps in managing the costs of significant claims, leading to lower premiums.

Scenario 2: Discouraging Minor Claims

Now, consider a minor scratch on your car, costing around $300 to repair. Since this is less than your $500 excess, filing a claim doesn't make financial sense. This discourages you from making small, potentially frivolous claims, which helps your insurer manage resources better and keep overall premiums lower for everyone.

Encouraging Responsible Behaviour

In both scenarios, knowing you have an excess can encourage you to take precautions to avoid such incidents. Whether it's driving more carefully to avoid accidents or taking steps to protect your car from potential damage, this responsible behaviour can lead to fewer claims overall, contributing to a more sustainable insurance environment.

Can paying an excess make insurance premiums cheaper?

Usually, agreeing to pay a higher excess will get you a cheaper insurance policy.

Providers will often offer different price tiers based on the amount of excess you’re willing to pay. If you’re willing to pay a higher excess, they’ll generally lower your quoted premium. Your nominated excess will then replace the standard excess required for all claims made with that specific provider’s policy.

Opting for a higher excess can be a useful money-saving strategy for people who aren’t likely to file an insurance claim, since it’ll reduce monthly premium costs. However, be aware that when the worst happens, you may have to fork out more cash at claim time – and you may have to pay multiple excesses, too. Do you have enough savings to cushion the cost? 

It’s all about value for money and finding the right balance for you between paying more now, or later.

Why not test it out for yourself? When comparing insurance quotes, adjust your voluntary excess to see how it affects your payments.

When do you not have to pay an excess?

Not every policy requires an excess, and not all claims on a given policy will have excesses, either. Your insurance company may also waive your insurance excess payment in certain circumstances, like if you were not at fault in a car accident.

Always check the claims process outlined in the PDS before purchasing a policy or making a claim.

Can I pay my car insurance excess in instalments?

Typically, an insurance excess is paid as a lump sum whenever your claim is approved. If you’re experiencing financial hardship, you may be able to ask to pay your insurance excess in instalments.

However, this is more common in comprehensive car insurance policies or combined home insurance policies where you have the option to change your excess or add optional extras. It will also depend on your provider and the terms and conditions of your policy, as outlined in the PDS.

Do you still have to pay an excess for write-off claims?

Unfortunately, yes. Every time your insurance provider settles a claim, you will have to pay any and all associated excesses, even if your car is written off or your home requires rebuilding.

Be sure to consider the worst case scenario and how much coverage you’ll receive whenever comparing insurance policies.

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Scratching your head over tricky insurance terms? For more tips and tricks, subscribe to our weekly newsletter Moneyzone.

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