Insurance Deductibles: What They Are and Why They Matter

In insurance, a 'deductible' refers to the portion of the claim amount you must pay before your insurer covers the remaining costs. Think of it as a way to share the financial responsibility with your insurer. Choosing a higher deductible typically lowers your premium. This is because insurers see it as a sign of responsibility — you’re committing to pay out-of-pocket for smaller claims, reducing the likelihood of frivolous claims. By sharing more financial risk, you ease the insurer’s burden, making your policy more affordable.

Why are Deductibles Important?

Think of a deductible as a non-refundable deposit you pay when booking a hotel. You cover this initial cost to confirm your stay, assuring the hotel that you’re serious about the booking and unlikely to cancel at the last minute. Similarly, in insurance, agreeing to a higher deductible shows reliability to the insurer. By committing to pay a portion of the claim amount out-of-pocket, you demonstrate that you’re less likely to make frivolous or fake claims. In turn, the insurer rewards this responsibility with a lower premium.

It’s important to note that deductibles are fixed, unlike co-payments, which are usually calculated as a percentage of the claim. For example, with a co-pay of 20%, you’d pay ₹20,000 on a ₹1,00,000 claim. However, with a ₹5,000 deductible, you are only expected to bear ₹5,000 in case of a claim, and the insurer covers the remaining amount.

Breaking It Down: A Simple Example

In car insurance, there are two types of deductibles:

1. Compulsory Deductible (CD): This is a fixed amount, usually ₹1,000 or ₹1,500, mandated by the insurer.
2. Voluntary Deductible (VD): This is an additional deductible you can opt for, based on the amount you’re comfortable paying out-of-pocket, in exchange for a reduced premium.

These deductibles apply per claim, which means you pay them for each individual claim you make. Let’s understand this with a simple example:

Example:

• Claim Amount: ₹20,000
• Compulsory Deductible (CD): ₹1,000
• Voluntary Deductible (VD): ₹5,000

Calculation:

• Total Deductible = CD (₹1,000) + VD (₹5,000) = ₹6,000
• Amount Paid by Insurer = ₹20,000 - ₹6,000 = ₹14,000

So, in this case, you bear ₹6,000, and the insurer covers the remaining ₹14,000.

Balancing Costs and Coverage

Deductibles let you customise your insurance plan based on your financial situation. They help you balance affordable premiums and manageable out-of-pocket expenses, ensuring your policy fits your budget and providing peace of mind.