Unfortunate events, such as damage to your vehicle or property and medical emergencies, can happen anytime in life. Bearing the entire expense of these situations all by yourself can burn a hole in your pocket. You can protect yourself from these financial woes by insuring yourself and your business.
In the realm of insurance, two critical concepts– compulsory excess and voluntary excess– are of utmost importance. Every policyholder must understand these concepts before purchasing an insurance policy. These two excesses determine the amount of money a policyholder pays before the insurer covers the rest of the claim.
In this article, we’ll discuss the two concepts as well as the advantages of opting for voluntary excess.
Two Types of Insurance Excess Explained
The two types of insurance excess are as follows:
Compulsory Excess
A mandatory amount that an insurance policyholder must pay for each claim before the insurer starts covering the remaining expenses is known as compulsory excess. The insurer sets this amount, and it is non-negotiable.
The purpose of this insurance excess is to discourage small or frivolous claims. It is also designed to ensure that policyholders have a financial share in their insurance coverage.
Suppose your compulsory excess of workers’ compensation is $500, and you claim $2,000 in damages. As a policyholder, you will be required to pay the compulsory excess, and the insurance company will settle the remaining $1,500.
You must be aware of the compulsory excess specified in your insurance policy when considering filing a claim. This will help you determine the financial impact of filing a claim and whether it aligns with your budget.
However, it’s always a good idea to set aside funds to cover the excess amount. Should there be a claim, you will be financially prepared to pay the compulsory excess. With excess insurance, employers set aside a certain amount to assume financial risk for providing Workers’ Compensation benefits, states Prescient National.
Voluntary Excess
Where compulsory excess is obligatory, voluntary excess is discretionary or optional.
Voluntary excess is the extra amount that you choose to pay voluntarily in addition to the compulsory excess set by the insurance provider. In the event of a claim, the voluntary excess is combined with the compulsory excess to round off the amount you must pay before the insurance kicks in.
Opting for a voluntary excess or voluntary deductible shows a policyholder’s willingness to bear a certain component of their own risk. Unlike compulsory excess, which is decided by the insurer, policyholders enjoy the flexibility of selecting their voluntary excess. You can opt for as high or low excess as you want based on your risk tolerance and preference.
Here is an example of how voluntary excess works. Let’s say your compulsory excess of auto insurance is $500, and your voluntary excess is $1,000. If you make a claim for $2,000, you will have to pay the combined total of both excess amounts, i.e., $500 compulsory + $1,000 voluntary = $1,500. The remaining amount, which is $500, will be paid by the insurance company.
Advantages of Opting for Voluntary Excess
Out-of-pocket expenses are high in voluntary excess in the event of a claim, but the potential benefits outweigh the cost. Here are some advantages of opting for voluntary excess:
1. Lower Premiums
The primary advantage of voluntary excess is the potential reduction in insurance premiums.
A high voluntary excess typically results in low insurance premiums. As the policyholder agrees to bear a greater share of the financial responsibility in case of a claim, insurance holders charge low premiums. Therefore, you can use the money you save on premiums to purchase add-on covers.
However, you will have to pay high premiums if you opt for a lower voluntary excess.
2. Financial Control
Choosing voluntary excess provides greater control over finances.
Compulsory excess is non-negotiable and set by the insurer, but policyholders can decide their voluntary excess amount. This allows individuals to maintain better control over their budgets.
You can set your excess as high or low as you want by taking into consideration your budgetary constraints. This isn’t possible with compulsory excess.
3. Encourages Responsible Behavior
Another significant benefit of voluntary excess is that it encourages policyholders to be more cautious and responsible in their actions. Since you will have to pay expenses out of your pockets, you are more likely to take preventive measures.
In areas such as auto insurance, drivers adopt safer driving practices. That’s because they know that they will have to bear expenses out of their pockets in the event of a claim. Therefore, they try their best to minimize the possibility of accidents, reducing unexpected financial burdens.
To sum things up, compulsory and voluntary excess are integral components of insurance policies because they shape how policyholders share the financial responsibility in case of a claim. The former is set by the insurer and is non-negotiable, but the latter can be decided by the policyholder. The higher the voluntary excess, the lower the premium will be.
However, striking a balance between the two is essential. That’s because it affects a claim’s financial implications as well as the overall affordability of the policy.
