Mr. Sharma, my neighbor, decided to buy his dream car and visited several dealerships to finalize one where he was informed about the provision for a compulsive insurance cover on the vehicle.
Being a thorough man, he came back home and started researching the features of Motor Insurance. Needless to say, he got confused by the technical jargon and the varied clauses.
Seeking enlightenment and a way to lower the premiums, he sought my help and enquired about the deductibles.
Being a thorough person myself, I gave him a lowdown on the types of Motor Insurance Policies and deductibles applicable to each. Here is what we discussed:
Types of Motor Insurance Policies
There are 2 types of Motor Insurance policies namely:
a) Third-Party Liability Only Policy – This is a mandatory cover that needs to be taken for any vehicle plying on the road. The policy covers damages due to any third party and the premium is very low.
b) Comprehensive Coverage Policy – This policy can be voluntarily availed by the policyholder for a more inclusive coverage on his vehicle which provides an all-round protection.
The coverage includes damage to the vehicle through every factor such as theft and fire other than the third-party damage cover. While the Third-Party Policy is compulsory, this policy depends on the choice of the policyholder.
What are Deductibles?
Deductible is part of the claim and is to be paid by the policyholder before the insurance company takes the responsibility of the remaining claim.
Types of Deductibles
Deductibles are of two types:
a) Compulsory Deductible – The compulsory deductible amount is fixed by the insurer and has to be paid compulsorily by the policyholder whenever any claim arises.
As per IRDAI, the amount of Compulsory Deductible varies from Rs.50 for two-wheelers to Rs.500 for four-wheelers.
The insurer may charge a higher deductible if the car is older and presents a larger risk of claim or for cars with higher cubic capacities or in other circumstances where the risk of claim is perceived to be higher.
There is no lowering of premium for compulsory deductibles and premium is calculated taking into consideration other factors such as IDV, make and model.
b) Voluntary Deductible – This is the limit chosen by the policyholder to meet a part of the claim from his own pocket before raising it to the insurer.
The amount depends on the policyholder who chooses the limit factoring in his affordability and risk. Choosing a higher amount of Voluntary Deductible causes a lowering in premiums through discounts. For example, ICICI Lombard gives a discount of 20% in premium for choosing a deductible of Rs.2500.
|It is compulsorily fixed by the insurers||This is chosen by the policyholder and is not mandatory|
|The level of compulsory deductible has no effect on the premium rate||Higher the level of Voluntary Deductible, lower is the premium rate|
|In case of claim, only the compulsory deductible level needs to be paid which is low||In case of claim, the policyholder has to pay both the compulsory deductible part and the voluntary deductible chosen, the total of which is higher|
Deductibles are provided only in Comprehensive Coverage policies with a view to lower the incidence of claims. Compulsory deductibles discourage policyholders to raise smaller claims because they know that a part of it will have to be met by them.
A higher level of compulsory deductible ensures that drivers will be urged to drive cautiously to avoid damages and resultant claims.
Choosing a Voluntary Deductible amount which promises a discount in premiums is a way to ensure policyholders avoid claims and when they do, they share in the costs, making them more careful.
For example, a person with a Voluntary Deductible limit of Rs.3000 suffers a damage of Rs. 10,000, he will first have to pay Rs.3500 assuming that the compulsory deductible level is of Rs.500 and then the insurer will pay the remaining Rs.6500 to settle the claim.
Says Vijay Kumar, President, Motor Insurance for Bajaj Allianz General Insurance, ‘’ those who are confident of their driving ability could opt for a voluntary deductible to save on premium’’.
Mr. Sharma was sufficiently educated and went on to buy his dream car. Deductibles are important in your motor insurance plans and should be carefully planned taking into consideration affordability in case of the Voluntary deductible clause because the discount in premium isn’t the only deciding factor.
You should make sure that the savings in premiums outweigh the out-of-pocket expenditure required at the time of claim.
So, if you are a cautious person with sufficient disposable income, opt for a higher voluntary deductible. However, if you happen to be someone with rash driving skills or with lack of extra money at the time of claim, either avoid choosing voluntary deductibles or go for a very low amount.