What is an Insurance Deductible?
A deductible in insurance refers to the out-of-pocket amount a policyholder must pay for repairs in case of damage or loss. Once this is paid, the insurer covers the remaining costs within the policy limits.
In simpler terms, the deductible is the policyholder’s share of the claim. It is one of the conditions for the insurance contract.
For example, if you insure your office and equipment, the insurer may state that claims up to ₹1 lakh will have a deductible of either 1% of the claim or ₹10,000, whichever is higher.
How does Insurance Deductible Work?
An insurance deductible helps cover large, unexpected losses that exceed your financial capacity. Everyone has a limit on the expenses they can manage, and the same principle applies to insuring assets.
For instance, if you own a car worth ₹10 lakhs, with an insurance premium of ₹55,000 and a deductible of ₹15,000, you agree to handle any claims up to ₹15,000. Beyond this, the insurer covers the remaining costs.
In this case, ₹15,000 is the deductible you can afford, which essentially means you self-insure up to that amount. If your car suffers damage costing ₹40,000, you’ll pay ₹15,000, and the insurer will cover the remaining ₹25,000.
What happens when the claim is below the deductible? If the claim is less than the deductible, the insurer won’t cover it, meaning the entire cost falls on you.
It’s essential to understand your policy, especially the deductible, as it determines your out-of-pocket expenses during a claim.
Consider factors like age, condition, and susceptibility to damage when insuring assets. For example, a 10-year-old car may still require expensive repairs even though its insured value has depreciated. As repair costs rise while your vehicle’s value decreases, be mindful of the deductible when renewing insurance.
Types of Deductibles in Car Insurance
A car is one of the most valuable assets we purchase with hard-earned money. Every car insurance policy includes a deductible, which is the portion of a claim that the policyholder must pay. In car insurance, there are two types of deductibles: Compulsory and Voluntary.
Compulsory Deductible
A compulsory deductible is the fixed amount the policyholder must pay before the insurance company covers the remaining loss. In India, it is mandatory to have at least third-party car insurance, and a compulsory deductible is part of this policy. The deductible amount is determined based on the vehicle type.
For instance, Sheetal owns a Honda Activa with a cubic capacity of 109.2. The compulsory deductible for two-wheelers under 350 cc is ₹50, which will be deducted from her total claim settlement in case of a loss.
Similarly, for four-wheelers:
- Cars with a cubic capacity below 1500 cc have a compulsory deductible of ₹500.
- Cars with a cubic capacity above 1500 cc have a deductible of ₹1,000.
Voluntary Deductible
A voluntary deductible is one that the policyholder chooses. Opting for a higher voluntary deductible reduces the insurance premium, and vice versa.
Just like we choose smartphones that fit our budget and needs, we select a voluntary deductible based on our ability to bear potential expenses. Before choosing, we consider:
- Savings
- Risk level and premium
- Vehicle value
- Type of coverage
For example, a 20-year-old car insured under a Third-Party Liability cover only will require the policyholder to bear the deductible for any own damage. In such cases, the deductible is manageable given the vehicle’s age and use.
Types of Deductibles in Health Insurance
Curious if health insurance has a deductible? The answer is yes. Health insurance also includes two types of deductibles: compulsory and voluntary. These work similarly to the deductibles in car insurance.
In the early years of coverage, opting for a higher deductible and making no claims can improve your claim ratio and help accumulate bonuses. This approach allows the policyholder to have a substantial sum insured in later years.
Difference between Compulsory Deductibles and Voluntary Deductibles
| Compulsory Deductible | Voluntary Deductible |
| A fixed amount determined by the insurer that the policyholder must pay on any claim. | An amount selected by the policyholder, paid during claims. |
| Does not influence the premium. | Impacts the premium directly; higher deductible means lower premium, and vice versa. |
