Common misunderstandings about voluntary deductibles

In car insurance terminology, a voluntary deductible is essentially the amount that the policyholder agrees to pay for future repairs of his vehicle, in the event of an accident. The policyholder is required to pay this amount before the insurer contributes the rest of the claim value. In addition to the voluntary deductible, the policyholder will have to pay the component for compulsory deductible, which will amount to a substantial value at the time of a claim.

For example, if costs Rs. 2000, and you opt for a voluntary deductible worth Rs. 1000, this is paid in advance as an investment towards the repairs of your vehicle. The remaining claim amount will be covered by the insurance provider, upto the limits mentioned in the policy. As the amount corresponding to voluntary deductibles chosen by you increases, you will be required to pay a smaller premium.

Here, we provide clarifications for the common misunderstandings that people have about voluntary deductibles.

  • Unwanted investments - Some people are of the opinion that voluntary deductibles are unnecessary investments. A confident driver would feel that there is no need for him to pay upfront for a future mishap, when he is already very cautious on the roads. However, opting for a voluntary deductible will positively impact the more confident driver on the road than a rash one. By paying an amount upfront, he stands to benefit from a reduced premium, which may work out to be more profitable for him in the long run.
  • The clause of co-payment - Similar to the voluntary deductible, adding co-pay to your car insurance enables the policyholder to pay a certain amount of their claim. The co-pay amount is usually preset in the insurance policy, and it ranges from 10%-25% of the claim value. For instance, if the car owner agrees to co-pay Rs. 10,000 for a claim of Rs. 1 lakh, then the insurer contributes the remaining amount, i.e., Rs. 90,000, at the time of the mishap.
  • Co-pay versus Voluntary deductibles - The concepts of co-pay and voluntary deductibles are often confused. It should be noted that the difference between these two clauses is the way in which the car owner makes the payment. The policyholder pays the voluntary deductible first, when he files a claim. Once this has been done, the insurer settles the remaining amount. In the case of co-payment, the final claim amount is split between the insurer and the policyholder, as per the percentage agreed upon in the policy.
  • Be cautious before opting for add-ons - Since co-payment and voluntary deductible clauses provide you discounted premiums, you should not opt for these without proper research and calculations. You have to determine whether you really need to include these in your policy, and work out the cost-benefit analysis for the same. You can make a decision based on your findings.
  • Not the same as No-Claim Bonus - Voluntary deductible is often confused with No-Claim bonus. When a policyholder does not file any claims, he is rewarded with the No-Claim bonus, which is a discount in the premium for the following year. This discount also increases with subsequent claim-free years. On the other hand, if you do not avail a voluntary deductible, you will not benefit from any further discounts in your premium. Moreover, the voluntary deductible is allowed only once, i.e., at the time of payment.

It is very important that you understand the clauses included in your insurance policy. In this regard, you should read the policy documents carefully to make an informed decision about add-ons, and avoid hassles during the time of claims.

GST Update: GST of 18% is applicable on car insurance effective from the 1st of July, 2017

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