How Much Excess Should You Have on Car Insurance?

Car insurance policies include excess, a predetermined amount policyholders pay out-of-pocket when making a claim. This amount influences both your premium cost and the practicalities of filing a claim. Understanding how excess works is important for anyone purchasing or renewing car insurance, as it directly impacts your financial responsibility in an incident.

Understanding Car Insurance Excess

Car insurance excess, also known as a deductible, is the fixed sum you pay toward a claim before your insurance company covers the remaining costs. This mechanism serves to reduce insurers’ immediate risk and discourage numerous small claims, allowing them to manage liabilities more effectively.

There are two main types of excess: compulsory and voluntary. Compulsory excess is an amount set by your insurer, determined by factors like driver’s age, driving history, and vehicle type. Voluntary excess is an additional amount you choose to pay, which can influence your annual premium. When a claim is made, both compulsory and voluntary excess amounts combine to form your total out-of-pocket payment.

For example, if your car sustains $3,000 in damages with a $500 total excess, you pay the initial $500, and your insurer covers the remaining $2,500. If the repair cost is less than or equal to your total excess, such as $400, you pay the entire $400 yourself, and the insurer does not pay out. This ensures minor damage costs are handled by the policyholder, reserving insurance for more substantial financial burdens.

Factors to Consider When Choosing Your Excess

Choosing an appropriate excess amount requires assessing your financial situation and driving habits. Your ability to comfortably pay the excess without financial strain is a primary consideration. Choose an amount you could readily access from an emergency fund, ensuring preparedness for an unexpected payment.

Your driving habits and risk tolerance also play a role. Cautious drivers with few or no accidents might consider a higher voluntary excess, which leads to lower annual premiums. Conversely, drivers anticipating a higher likelihood of needing to file a claim may prefer a lower excess, even if it means a higher premium.

The value and typical repair costs of your vehicle should influence your decision. For older, lower-value vehicles, a very high excess might mean that the out-of-pocket amount is close to or even exceeds the car’s market value, making an insurance claim impractical for minor incidents. In contrast, for newer, more expensive vehicles with potentially high repair costs, a higher excess might still represent a manageable portion of the overall expense.

Weigh the trade-off between premium savings and potential claim payouts. A higher voluntary excess results in a lower annual premium. However, a lower excess reduces your out-of-pocket expense at the time of a claim. Balance immediate savings against your willingness and ability to pay a larger sum if an incident occurs. A clean claim history may offer more flexibility to opt for a higher voluntary excess without impacting your insurance eligibility or rates.

Impact of Excess on Premiums and Claims

The excess amount you choose directly influences your car insurance premiums. Opting for a higher voluntary excess reduces your annual premium because you take on a greater portion of the financial risk. For example, raising your excess from $500 to $1,000 might reduce your premium by a notable percentage, saving you hundreds of dollars annually.

When a claim is approved, the excess amount is subtracted from the total repair or settlement cost. If you have a total excess of $750 and the damage to your vehicle amounts to $2,500, the insurance company would pay $1,750 after you contribute your $750. This deduction applies regardless of the claim’s size, provided it exceeds the excess amount. If the repair cost is less than your excess, you will be responsible for the entire amount, as the insurer’s contribution would be zero.

A higher excess can also discourage filing claims for minor damages. If a repair costs $400 and your total excess is $500, it is not financially advantageous to file a claim. Paying for minor repairs out-of-pocket helps protect your no-claims bonus, also known as a no-claims discount. This bonus rewards drivers for not making claims, leading to significant premium reductions in subsequent years and further reducing future insurance costs.

When to Re-evaluate Your Excess

Reviewing your car insurance policy, including your excess amount, is a prudent financial practice. Significant life changes warrant re-evaluation of your coverage needs and financial capacity. For example, improved income or a robust emergency fund might enable you to afford a higher excess, leading to lower premiums. Conversely, new financial obligations could necessitate choosing a lower excess.

Changes in your driving habits or vehicle can also influence the ideal excess amount. If you start driving less frequently, move to an area with lower crime rates, or acquire a different vehicle, your risk profile changes. These circumstances might allow you to adjust your excess to align with your current situation.

Experts recommend reviewing your policy at least annually or every six months, as market conditions and individual circumstances can shift rapidly. Policy renewal time presents a natural opportunity to assess your excess options for the upcoming term. Considering your excess as part of your overall financial planning ensures your insurance remains suitable for your evolving needs.