What Does Excess Mean in Insurance?
Unpack the concept of insurance excess. Discover its role in your policy, how it impacts claims, and what influences the amounts you pay.
Insurance policies frequently include “excess,” the initial amount a policyholder is responsible for paying out-of-pocket when a claim is made. This sum must be covered before the insurance provider contributes to the remaining costs of a covered loss. It applies across various types of insurance, including car, home, travel, and health policies.
Understanding Insurance Excess
Excess in insurance serves a dual purpose, benefiting both the insurer and the policyholder. For insurers, it helps mitigate small, low-value claims, making processing more efficient and helping to keep overall premium costs lower. For policyholders, excess encourages careful behavior due to a direct financial stake in preventing incidents. A higher excess can also lead to a lower annual premium.
Insurance policies typically specify two main types of excess: compulsory and voluntary. Compulsory excess is a fixed amount determined by the insurer, non-negotiable, and varies based on factors like policy type, risk, and policyholder circumstances. Voluntary excess is an additional amount the policyholder chooses to pay on top of the compulsory excess. Selecting a voluntary excess can reduce insurance premiums by signifying greater financial responsibility. Both excess amounts are clearly stipulated in policy documents.
How Excess Affects Your Claim
When a policyholder files a claim that is approved by the insurer, the excess amount comes into play as a direct financial contribution from the insured. The process typically involves either the excess being deducted from the total payout made by the insurer, or the policyholder being required to pay the excess directly to a repairer or service provider. For instance, if a car repair costs $2,000 and the policy has a $500 excess, the policyholder would pay $500, and the insurer would cover the remaining $1,500. In some cases, such as a not-at-fault car accident, the excess might be recoverable from the at-fault party’s insurer, or it might be waived entirely.
The excess is applied per claim, not per policy period. If multiple separate incidents occur within the same policy year, the excess amount is payable for each valid claim. For example, a homeowner with a $500 excess who experiences two separate incidents of damage in a year would pay $500 for each claim. If the cost of repairs for an incident is less than the total excess, it generally does not make financial sense to file a claim, as the policyholder would be responsible for the entire repair cost.
Factors Influencing Excess Amounts
The amount of excess a policyholder is required to pay, or can choose to pay, is influenced by several variables. The specific type of insurance policy plays a significant role; for example, car insurance policies often have different excess structures compared to home or health insurance. The insurer’s risk assessment and terms also determine the compulsory excess, which can vary widely. Policyholders can influence their total excess by selecting a voluntary amount. A higher voluntary excess typically results in lower insurance premiums, as it signals willingness to bear more initial financial risk.
Individual characteristics of the policyholder and the insured asset also contribute to excess calculations. For car insurance, factors such as age, driving history, and vehicle make, model, and age can affect the compulsory excess. Younger or less experienced drivers, or those with a history of claims, might face higher compulsory excesses due to perceived higher risk. Vehicle location and the policyholder’s overall claim history can also impact excess costs. When choosing an excess, it is important to balance potential premium savings with the ability to afford the out-of-pocket payment in the event of a claim.