What Is Insurance Deductible and How Does It Work?
Insurance works on different types of technical concepts. While the policy promises to pay you the compensation for a financial loss that you suffer, the claim involves some technical details which many of you might overlook. As a result, when the claim is delayed or not paid in full, you are disappointed. That is why it becomes important to understand all the technical terms and conditions with respect to your insurance claims. A deductible is one such concept which needs your attention. Do you know what insurance deductibles are?
What is an insurance deductible?
An insurance deductible represents the amount of claim which you have to pay. The deductible, therefore, is your out-of-pocket expenses in each and every instance of claim. The insurance company pays the claim which is in excess of the deductible limit. For instance, if, in an insurance policy there is a deductible of INR 3000 and you make a claim of INR 10,000, the insurance company would pay only INR 7000 while you have to foot the deductible of INR 3000.
How do insurance deductibles work?
In many types of insurance policies, there is a predefined deductible limit. This limit is communicated to you through the policy brochure and policy wordings when you buy the plan. The company states that claims exceeding the deductible would be paid. When you suffer a loss, the claim for the insurance company would be triggered only if the claim exceeds the deductible. In such cases, the insurance company would pay the excess claim and you shoulder the deductible amount yourself.
Where are insurance deductibles applicable?
The following types of insurance policies have insurance deductibles built into their terms and conditions:
- Motor insurance policies
- Travel insurance policies
- Fire and property insurance policies
- Health insurance policies, etc.
Types of insurance deductibles
Insurance deductibles can be of two types – compulsory and voluntary. Compulsory deductibles are those which are compulsorily applied by the insurance company. You have no control over them and have to bear them in case of claims. Voluntary deductibles, on the other hand, are those which you can choose yourself. If you choose a voluntary deductible limit, you choose to pay a part of the claim yourself. In such cases, the insurance company allows you a premium discount as you reduce the claim liability for the company. Voluntary deductibles are, however, treated over and above the compulsory deductible. If the plan already has a compulsory deductible and you also choose a voluntary deductible, you would have to bear both the deductibles at the time of claims. Choosing a voluntary deductible does not remove the compulsory deductible.
Why insurance deductibles are relevant?
There are two main reasons why insurance companies impose a deductible under the policy. These reasons include the following –
- To discourage you from making smaller claims on your policy. Since you would have to bear the deductible, companies believe that smaller claims would not be made on them and they can reduce their claim liability
- To prevent reckless claims from policyholders and to minimise losses due to moral hazard. When there is a deductible, you would be careful in raising a claim as you would also incur out-of-pocket expenses. Moreover, people intending to profit from insurance claims would be discouraged in buying the policy
Deductibles vis-à-vis co-payment – meaning and difference
In health insurance plans the concept of co-payment is applicable in many cases. Co-payment also means paying a part of your health insurance claim yourself. However, co-payment and deductibles are different. Here’s how –
|Deductible, if applicable under the policy, would be applicable for all customers||Co-payment is applicable only in certain instances. It is not applicable to all policyholders|
|Deductibles are usually found in top-up or super top-up health insurance plans. Under these plans, the choice of the deductible is in your hands.||Co-payment is found in almost all health insurance plans. This is usually applicable if the insured member is aged 60 years and above|
|Under normal health insurance plans, deductibles might be offered as an option and if you choose the deductible you can avail premium discounts||There are no premium discounts for co-payment and co-payment is not optional. It is compulsory for the cases where co-payment is applicable. For instance, if the insured is aged 60 years and above or if the policy is bought in a non-metro city and the claim is made in a metro city the co-payment would be compulsory.|
So, though both concepts infer your out-of-pocket expenses, they are quite different from one another in terms of their relevance and meaning.
Amount of insurance deductible
The amount of deductible applicable to insurance plans depends on the type of plan that you buy and the insurance company’s discretion. Only in case of motor insurance plans, the deductible limits are fixed. For two-wheeler insurance plans the deductible is INR 50 and for four-wheelers, the limit is INR 500 for cars with engine capacities up to 1500 cc and INR 1000 for cars having a higher capacity. In other types of insurance plans, the deductible limits vary across plans and companies.
What you should do?
When you are buying an insurance policy, check for insurance deductibles. If the policy has deductibles, compare and choose a plan which has the lowest deductibles. A lower insurance deductible means a lower out-of-pocket expense for you and so you should try and choose plans which have limited or low deductibles to reduce your claim burden.
Frequently Asked Questions
- Can I avoid insurance deductibles?
No, you cannot. If the insurance policy has deductibles those deductibles would be compulsory and you would have to bear them. You can only avoid voluntary deductibles, not compulsory ones.
- Are deductibles expressed only in amount?
No, deductibles can be expressed as a percentage of the total claim or in hours also. For instance, in travel insurance policies, a deductible of 6 to 12 hours is applicable in case of delay of checked-in baggage or missed flight connection. In such cases, the delay should be more than the specified deductible period for your claim to be valid. Similarly, in fire insurance policies, architect, surveyor’s or engineer’s fee can be covered as an optional cover if it is in excess of 3% of the claim amount. In these cases, the deductible is expressed in a percentage of the claim amount.
- Do life insurance plans have deductibles?
No, deductibles are not applicable for life insurance plans.
- How do deductibles work under top-up health plans?
Under top-up health plans, you choose a sum insured and a deductible limit. If any claim exceeds the chosen deductible limit, the policy pays the excess claim. For instance, if you choose a deductible of INR 1 lakh and you face a claim of INR 1.5 lakhs, the top-up plan would pay INR 50,000 as a claim.
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