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What is Deductible in Car Insurance: Meaning, Types & How it Works?
Deductibles in car insurance are an important part of the policy and need to be understood well, as deductibles represent the amount you must pay out of your pocket before your insurance covers the remaining costs of a claim.
Therefore, choosing the right deductible is equally important as a higher deductible means lower premium and the higher you will have to pay out of your pocket at the time of a claim.
So, understanding how deductibles work in car insurance is crucial for you to be able to make informed decisions about your car insurance policy.
What are Car Insurance Deductibles?
Deductibles in car insurance, as the name suggests, are the part of the claim amount that you are responsible for paying. It can be understood as a cost-sharing arrangement between you and your insurer, where a portion of the car insurance claim must be paid by you.
Also, the deductible amount is already set by IRDAI and is based on the car’s engine cubic capacity.
One major complaint that has always hit us is that insurance companies are not always transparent or upfront about the terms. Customers feel that they are only told half the truth about claims, and when the time comes not everything is taken care of by the insurer, as promised. However, your insurer will probably tell you that your policy document has a term called deductibles, which explains this part of the bargain.
But, oh boy, the pain of going through a 50 pager! 😔 And hence we thought of making the meaning of deductibles and the difference between Compulsory & Voluntary deductibles simple for you.
How Deductibles in Car Insurance Work?
Let’s understand what is voluntary deductible in car insurance, with the help of an example.
Suppose you have a comprehensive car insurance policy with a deductible of ₹10,000. One day, you get into an accident, and the total repair cost for your car comes out to be ₹50,000.
So, here's how deductibles will work in this case:
- Repair Cost: The total cost to repair your car after the accident is ₹50,000.
- Deductible: Your insurance policy has a deductible of ₹10,000. This means you are responsible for paying the first ₹10,000 of the repair costs out-of-pocket. This is your share of the cost, as per the deductible amount.
- Insurance Payment: After you have paid the ₹10,000 deductible, your insurance company will cover the remaining repair costs, which in this case is ₹40,000 (total repair cost - deductible).
What is the Importance of Deductibles in Car Insurance?
Deductibles are an essential aspect of car insurance policies as they help balance the cost and risk between the insurer and the policyholder. Here are other reasons why they are important:
Cost Sharing
With deductibles, it is ensured that the cost of claims is divided among the policyholders and the insurance company. By paying a portion of the repair or replacement costs, policyholders are more likely to avoid filing minor claims, which helps keep the insurance costs down.
Premium Reduction
Higher deductibles lead to lower car insurance premiums by reducing the insurer's risk. This leads to significant savings on your premiums.
Prevent Frequent Claims
The main motive of having compulsory deductibles in car insurance policies is to prevent policyholders from making frequent small claims. This helps reduce the administrative burden on insurance companies.
Less Accidents
Deductibles in car insurance also help encourage policyholders to drive more carefully as they know that they will have to pay a portion out of their pocket. This helps people become more cautious, thus reducing the rate of accidents.
Insurance Fraud Prevention
Deductibles also help to prevent fraudulent claims as policyholders are also paying a portion of the claim, so they are less likely to file false or fraudulent claims.
What is the Importance of Deductibles in Car Insurance?
Deductibles are an essential aspect of car insurance policies as they help balance the cost and risk between the insurer and the policyholder. Here are other reasons why they are important:
Cost Sharing
With deductibles, it is ensured that the cost of claims is divided among the policyholders and the insurance company. By paying a portion of the repair or replacement costs, policyholders are more likely to avoid filing minor claims, which helps keep the insurance costs down.
Premium Reduction
Higher deductibles lead to lower car insurance premiums by reducing the insurer's risk. This leads to significant savings on your premiums.
Prevent Frequent Claims
The main motive of having compulsory deductibles in car insurance policies is to prevent policyholders from making frequent small claims. This helps reduce the administrative burden on insurance companies.
Less Accidents
Deductibles in car insurance also help encourage policyholders to drive more carefully as they know that they will have to pay a portion out of their pocket. This helps people become more cautious, thus reducing the rate of accidents.
Insurance Fraud Prevention
Deductibles also help to prevent fraudulent claims as policyholders are also paying a portion of the claim, so they are less likely to file false or fraudulent claims.
Types of Deductibles in Car Insurance
Now there are 2 types of deductibles that come into play: Compulsory and Voluntary deductibles.
Compulsory Deductible
Compulsory deductible in car insurance is one where the policyholder has no choice but to pay a part of the claim. As per IRDAI regulations, ₹1000 compulsory deductible is applicable to cars of up to 1500 cc and ₹2000 compulsory deductible is applicable to cars with more than 1500 cc.
Also, note that a compulsory deductible in car insurance doesn’t lower the car insurance premium because the car insurance price is calculated taking into considering other factors like car’s IDV, make and model.
Voluntary Deductible
The voluntary deductible in car insurance, as the name suggests, is the voluntary amount that the policyholder chooses to pay out of his pocket as a part of the claim, before raising it to the insurer. The amount can be decided based on your affordability and risk appetite.
So, because you have voluntarily opted for this deductible amount, your premium amount gets reduced, but your out-of-pocket expenses increase during the claim.
Difference Between Compulsory and Voluntary Deductible in Car Insurance
Here is the difference between compulsory deductible in car insurance and voluntary deductible to help you make the right choice:
How Deductibles Affect Different Types of Car Insurance Plans?
Here’s how deductibles affect 3 main types of car insurance plans:
In third-party car insurance, deductibles generally do not apply, as the plan covers only third-party liabilities, so there is no need to pay a deductible when making a claim. Since no deductible is applicable in this type of policy, the car insurance premium is calculated based on other factors, such as the vehicle type, usage, and your driving history.
In comprehensive car insurance, both voluntary and compulsory deductibles are applicable because this type of car insurance plan offers wider coverage including damages to your own car. Therefore, with higher deductibles, the insurance premium will be reduced. Alternately, lower deductibles lead to higher premiums.
In own damage car insurance, the role of deductibles is similar to that in a comprehensive policy and you pay a deductible before the insurance covers the remaining repair costs. The choice of deductible affects your premium – a higher deductible will lower your premium, while a lower deductible will increase it.
When to Opt for Deductibles?
Having deductible is important because it instils a greater sense of responsibility while handling your assets and is a joint pact between you and your insurer. It makes you cautious about handling your assets and therefore, in turn, helps you in using your assets better.
Here are situations where you can choose voluntary deductible in your car insurance policy for your benefit:
- If you own an expensive car, its premium will be higher. So, you can get a smaller amount of voluntary deductible as it will help you decrease the overall premium.
- Since raising small claims impacts the No Claim Bonus (NCB), so you can choose a deductible amount equal to the approximate repair amount for which you may avoid raising claims.
In a way, deductibles in car insurance is a way of making you value your assets more!
Explain It like I'm five
A boy wanted to buy a bicycle for his birthday. But the parents were worried about his safety on the roads. After a lot of thought, they told the boy that he would get a cycle but on one condition. If any damage happens to the cycle, a part of the repair will be deducted from his pocket money. This will ensure that the kid is responsible for his riding to save his pocket money! The part of the pocket money that goes for the repairs is what we know as Deductibles in Insurance.
FAQs about Deductibles in Car Insurance
What is a deductible in car insurance?
A deductible is the amount policyholder pays out-of-pocket before the insurance coverage starts paying for a claim.
Which cars in India need a compulsory deductible?
All insured vehicles running on the Indian roads must have a compulsory deductible component in their policy, as it is mandatory by IRDAI.
Which deductible should I opt for car insurance?
The best deductible for car insurance depends on your financial situation and risk tolerance. Higher deductibles lower your premiums but increase out-of-pocket costs, while lower deductibles increase the premiums.
How much is the compulsory car deductible amount if my car’s engine is over 1,500cc?
As per IRDAI, the compulsory deductible amount for cars with an engine capacity of more than 1,500 cc is ₹2,000.
How can I avoid paying deductible in car insurance?
Paying any compulsory and any voluntary deductible in case of a claim cannot be avoided.
What if my deductible amount is more than the repair cost of the damage to my car?
In such a case, you must refrain from filing any claim as it will lead to your loss, and you may also lose your No Claim Bonus discount.
Why are deductibles important in car insurance?
Deductibles are included in insurance policies to ensure policyholders share in the cost of claims, discourage minor claims, and promote safe driving. Also, compulsory deductible is mandated by the IRDAI.