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Insurance Excesses: The Basics

Understanding the basic thinking behind insurance excesses gives you a head start when thinking about the cost of insurance.

They allow you to in effect reduce the cost of a given premium, by agreeing to pay a part of the cost of repair. In other words, for a better deal, you shoulder some of the risk.

To give a simple example, lets say you have windscreen insurance, but to get a good price, you agree to pay for the first £50 of any claim. So, you’re out driving and a whopping great stone decides to throw itself through your windscreen. So up trolls the windscreen repair boys and the bill is £250. You pay the £50 excess, usually direct to the company doing the job, and your insurance company pays the £200.

Couldn’t be simpler, but, of course, it can be a bit more complicated than that.

There are such things as compulsory excesses and voluntary excesses. As you might imagine, compulsory means just that, you have to aggree to it and, for example, it’s common with young drivers, who might have to agree to such terms until they reach a certain age. Voluntary, again, is as it sounds, it’s up to you and can help bring down the price of insurance. But then again, you have to weigh that with what might happen with a worst case scenario; you might end up facing quite a hefty bill to get your car back on the road.

Lets say you are an 18-year-old driver with car worth £2000 in total. Your insurance company has asked for a £500 compulsory excess and you have agreed to a voluntary excess of £500, and covered the remaining £1,000. Should the car end up in a ditch and is written off you, as the driver, would in reality end up with zero, because the insurance company’s commitment to you of £1,000, would be cancelled out by you owing them £1,000. So, you’ve lost your car and have no pay-out.

Had you not agreed to pay the voluntary excess of £500, you would have at least had that to come, although you would have to pay higher premiums, possibly made less onerous on a monthly payment plan.

That’s why you have to do the mathematics.

Insurance excesses; just make sure that when you volunteer for premium reducing excesses, you can still get a good deal should the nightmare come true.

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