How Does Voluntary Excess Work on Insurance Policies?

Voluntary excess is a portion of an insurance claim that a policyholder agrees to pay out of their own funds. This predetermined amount influences both the cost of an insurance policy and the financial responsibility of the insured should an incident occur. Understanding this concept is key to navigating insurance options effectively, balancing policy affordability with potential out-of-pocket expenses during a claim.

What Voluntary Excess Means

Voluntary excess is an amount you choose to contribute towards an insurance claim before your insurer covers the remaining costs. This sum is agreed upon when you purchase or renew your insurance policy. It is distinct from compulsory excess, which is a fixed amount set by the insurer that cannot be negotiated. While compulsory excess is determined by factors like the type of car, driver’s age, or risk level, voluntary excess is a discretionary amount you select.

The purpose of voluntary excess is to share the financial risk between the policyholder and the insurance company. This mechanism also discourages frequent small claims, ensuring that insurance primarily addresses significant, unexpected financial burdens. Both voluntary and compulsory excess combine to form the total excess that must be paid in the event of a claim.

How Voluntary Excess Affects Premiums

The amount of voluntary excess chosen directly affects your insurance premium. Opting for a higher voluntary excess typically results in a lower insurance premium. This reduction occurs because you are agreeing to bear a larger initial financial burden in the event of a claim, thereby reducing the insurer’s potential payout. For example, if a policy with a $250 voluntary excess costs $1,200 annually, increasing the voluntary excess to $1,000 might reduce the annual premium to $1,000.

Conversely, selecting a lower voluntary excess will generally lead to a higher insurance premium. This is because the insurer will be responsible for a greater portion of any claim from the outset, increasing their risk exposure. The savings on premiums from a higher voluntary excess can be attractive, but it is important to ensure that the chosen amount remains affordable if a claim becomes necessary. Insurers offer this flexibility to allow policyholders to customize their premiums based on their financial comfort and risk appetite.

Applying Voluntary Excess to a Claim

When an insurance claim is made, the voluntary excess, along with any compulsory excess, is applied to the total cost of the claim. This combined amount, known as the total excess, is the policyholder’s out-of-pocket contribution. Insurers typically deduct this total excess from the approved claim payout. For instance, if your compulsory excess is $250 and you selected a voluntary excess of $500, your total excess for any claim would be $750.

Consider a scenario where you make an approved claim for $3,000 in damages. The insurer would then pay out $2,250 ($3,000 claim minus $750 total excess). In some cases, the insurer might require the excess to be paid upfront to initiate the claims process, while in others, it is simply withheld from the final settlement amount. If the repair cost of damages is less than your total excess, it may not be financially beneficial to make a claim, as the insurer would not pay anything.

Deciding on a Voluntary Excess Amount

Choosing an appropriate voluntary excess amount involves evaluating several personal financial factors and risk preferences. A primary consideration is your financial capacity to pay the excess if a claim arises unexpectedly. It is advisable to select an amount that you can comfortably afford without causing significant financial strain. If the total excess amount would deplete your emergency funds or create hardship, a lower voluntary excess might be more suitable, even if it means slightly higher premiums.

Another important factor is your personal risk tolerance. Individuals who are comfortable with potential unexpected costs and believe they are less likely to make frequent claims might opt for a higher voluntary excess to benefit from lower premiums. Conversely, those who prefer more predictable expenses and want to minimize their out-of-pocket cost during an incident may choose a lower voluntary excess. Your past claim history can also inform this decision; a history of few or no claims might support a higher voluntary excess, while a history of more frequent claims could indicate that a lower excess is a safer choice.