The importance of car insurance in protecting your car is undisputable. Moreover, the legal mandate by the Motor Vehicles Act to have valid car insurance makes it even more relevant in India. However, despite the increasing adaptability of car insurance in India, people do not completely know the terms and conditions of their insurance contract. Hence, it is always advisable to understand your insurance contract thoroughly, including how to calculate car insurance and important terminologies like deductibles.
Here is all you need to know about deductibles in car insurance and its implications on your insurance policy:
What are deductibles?
A deductible is an amount that you pay out of your pocket while raising an insurance claim. This sum is determined before the start of the policy. Deductibles are a part of a co-pay agreement between you and the insurance company, where, you bear some part of the expenses at the time of claiming. However, deductibles vary from one company to another.
For example; Anil purchased insurance for car. His car met with an accident, and he raised a claim of Rs 10,000. As per the policy contract, Anil paid Rs 1,000 towards deductibles. The insurance company settled the balance of Rs 9,000 subject to the fulfilment of other terms and conditions. This Rs 1,000 co-pay or deductible was pre-determined at the time of signing the insurance contract.
What are the types of deductibles?
Typically, there are two types of deductibles in car insurance.
- Compulsory Deductible:
A compulsory deductible is a mandatory payment that you are required to pay at the time of filing the insurance claim. The Insurance Regulatory Development Authority of India (IRDAI) has issued the guidelines on deductibles. According to the IRDAI guidelines, the insurance company has to determine the deductible amount according to the below directives:
- The deductibles in an insurance contract will be based on the engine capacity of the car insured.
- For engines with a cubic capacity (CC) up to 1500, the deductible will be Rs 1,000.
- In all other cases, the compulsory deductible amount is Rs 2,000.
- An insurer may charge a higher amount in case of insurance for old cars. The deductible may also be high, where the possibility of the insurance claim is greater.
That said, this deductible does not influence the car insurance premium amount.
- Voluntary Deductible:
A voluntary deductible is optional and depends on your preference. You may choose to pay a part of the claim or not, at the timing of purchasing the policy. However, a voluntary deductible is paid over and above the compulsory deductible. Hence, it is always good to know the insurance terms and compute the voluntary deductible amount, as per your financial affordability and the potential risks.
That said, unlike a compulsory deductible, a voluntary deductible influences your car insurance prices. If you agree to pay a specific sum over the mandatory deductible, you enter into a co-payment contract with your insurance provider. Opting for the optional co-payment can earn you discounts in premium. Most insurers reduce your premiums by a specific percentage in return for a co-payment agreement.
In all, there is an inverse relationship between the deductible and insurance premium rates. Choosing to pay a higher deductible lowers the premium. Likewise opting for a lower deductible increases the premium amount.
Also, lower car insurance premium rates can result in savings over the long run. If carefully planned, the savings in premium exceed the out-of-pocket expenses during the claim. But procuring discounts in premiums must not be the sole goal of selecting optional co-pay. You must consider your disposable income while calculating the amount of this deductible.
Compulsory vs Voluntary Deductibles
|Particulars||Compulsory Deductibles||Voluntary Deductibles|
|Nature||It is mandatory in nature.||It is optional in nature.|
|Flexibility||The insurer fixes the amount of deductible, as per the directives of the IRDAI. Hence, it does not offer any flexibility.||You can decide the amount of deductible, as per your monetary capability and needs. Thus, the voluntary deductible has more flexibility.|
|Impact on premium||It does not impact insurance premiums.||The voluntary deductible influences the premium amount and has an inverse relationship with the premiums.|
|At the time of raising a claim||If you have not opted for the voluntary deductible, you only pay the mandatory deductible.||If you have chosen the voluntary co-pay, you must pay the mandatory, as well as the voluntary deductible amounts.|
When are both the deductible calculated?
Both deductibles are computed at the time of policy purchase. The amount and specific terms are explicitly mentioned in the insurance contract. However, the amount for both deductibles is payable only at the time of claim settlement. When you make a car insurance claim, the insurer adjusts both deductibles, if applicable or accommodates only the mandatory deduction. The final amount is then credited to you as the full and final settlement of the claim made.
Before buying the insurance for your car, discuss the deductible clauses with the insurer. Remember that it is your responsibility to pay the compulsory deductible. But you can also plan out the voluntary deductibles to fetch policy discounts. However, keep your financial capabilities in mind while you calculate car insurance voluntarily deductible.