Have you ever come across the term ‘deductible’ while reviewing your insurance policy and wondered what it really means? Understanding the concept of deductible in insurance can be a bit tricky, but it’s crucial when it comes to choosing the right insurance plan in India. Many policyholders struggle to grasp how deductibles affect their claims and premiums. If you are unsure how they work or how they impact your out-of-pocket expenses, you are not alone! In this blog, we will break down everything you need to know about a deductible and how it can influence your insurance costs. We will also discuss why it’s important to factor in deductibles when buying a policy. Let’s make it simple and clear!
What are Insurance Deductibles?
At its core, a deductible is the amount of money you must pay out-of-pocket before your insurance policy kicks in to cover any remaining costs. A deductible acts as a shared financial responsibility between you and the insurer, ensuring that you, the policyholder, are financially invested in your insurance plan.
For example, if you have health insurance with a ₹10,000 deductible, you are responsible for paying the first ₹10,000 of your medical expenses. After that, your insurer will cover the remaining costs as per the terms and conditions of your policy.
But why do insurers impose a deductible? Simple: A deductible reduces the number of small claims and, by extension, keeps premiums more affordable for policyholders. A higher deductible usually results in lower premiums and vice versa.
How Does a Deductible Work?
To understand how a deductible works, let’s explore the process step by step for different types of insurance policies commonly found in India.
Health Insurance: Imagine you have Health Insurance with a ₹10,000 deductible and you incur ₹30,000 in medical expenses. You will first pay ₹10,000 and your insurer will cover the remaining ₹20,000, assuming that the rest of the policy terms are met (such as coverage limits or co-pay clauses).
Car Insurance: Suppose you have purchased car insurance with a ₹5,000 deductible. If your vehicle’s repair costs after an accident amount to ₹25,000, you will pay ₹5,000 from your own pocket and the insurance company will cover the remaining ₹20,000.
Home Insurance: With home insurance, if your home sustains damage during a natural disaster and the total repair costs are ₹50,000 and you have a ₹15,000 deductible, you will need to pay ₹15,000 and the insurer will cover the remaining ₹35,000.
In each of these examples, the deductibles ensure that you, as the policyholder, share some of the financial responsibility for any claim. In return, this keeps your premiums lower and helps insurers manage risk.
Why Do Insurance Policies Have Deductibles?
You may be wondering why insurance policies even have deductibles in the first place. After all, you pay for coverage, so why should you be expected to pay a portion of the claim too? Here are some important reasons:
- Minimising Small Claims
Deductibles discourage policyholders from filing small claims that would typically cost less than the deductible amount. For example, if your car gets a minor scratch that costs ₹2,000 to repair, you likely won’t bother filing a claim because it’s less than your deductible (say ₹5,000). This helps insurers avoid administrative costs associated with processing small claims.
- Lowering Premiums
Deductibles allow insurers to lower premiums because the insurer isn’t covering smaller claims. If you agree to take on some of the risk through a higher deductible, insurers are willing to pass the savings on to you in the form of a lower premium. This makes insurance policies more affordable for those who don’t expect to make frequent claims and pay higher premiums.
- Risk-Sharing
The deductible is a mechanism for risk-sharing. You agree to pay part of the claim amount upfront and in return, the insurer takes care of the rest. This shared responsibility is a win-win for both parties, as it reduces the insurer’s exposure to risk while ensuring that the policyholder isn’t overwhelmed by higher premiums.
Types of Insurance Deductibles in India
In India, different types of deductibles can be found in various insurance policies. Let’s explore the common types:
- Fixed Deductible
A fixed deductible is a pre-determined amount of money that you, the policyholder, must pay per claim. This is one of the most common deductible types. For instance, if you have a Health Insurance Policy with a ₹5,000 fixed deductible and incur ₹10,000 in medical expenses, you will pay ₹5,000 and the insurance company will cover the remaining ₹5,000.
- Percentage-Based Deductible
Some policies, particularly in property and home insurance, use a percentage-based deductible. This means that the deductible is calculated as a percentage of the sum insured, not the claim amount. For instance, if you have a 2% deductible on a ₹10 lakh Home Insurance Policy and file a claim for ₹2 lakh, you would be responsible for paying ₹20,000 (2% of ₹10 lakh), and the insurer would cover the rest, subject to policy terms.
- Voluntary Deductible
A voluntary deductible is one that you can choose. By opting for a higher voluntary deductible, you can reduce your premiums. For example, if you increase your car insurance deductible from ₹5,000 to ₹10,000, you might see a reduction in your premium, but in the event of a claim, you will need to pay the higher amount yourself.
- Compulsory Deductible
A compulsory deductible is a fixed amount of money set by the insurer and is mandatory. In car insurance policies in India, the IRDAI mandates a compulsory deductible based on engine capacity—₹1,000 for cars up to 1500cc and ₹2,000 for cars above 1500cc. This amount is non-negotiable and must be paid on each claim. You may also opt for an additional voluntary deductible to further reduce your premium.
- Per Claim vs. Annual Deductible
Most insurance policies in India apply deductibles per claim. In some niche or high-deductible health insurance plans, an annual deductible may apply. In such cases, you bear out-of-pocket expenses up to a certain amount in a policy year before the insurer begins to cover the rest. However, this structure is uncommon in Indian retail health plans.
How Deductibles Affect Your Insurance Premiums
The relationship between deductibles and insurance premiums is significant. The basic rule is:
- Higher Deductible = Lower Premium
- Lower Deductible = Higher Premium
This is because the insurer’s financial responsibility decreases when you agree to pay a higher deductible.
Here’s how it works in practice:
Higher Deductible = Lower Premium: If you opt for a higher deductible, your insurer’s liability in the event of a claim is reduced. In return, they offer you lower premiums since they are less likely to pay out a large portion of your claim.
Lower Deductible = Higher Premium: If you choose a lower deductible, your insurer’s exposure to risk increases, as they will have to cover more of the claim. As a result, they charge higher premiums to balance the increased risk.
While choosing a higher deductible may seem like a good idea to save on premiums, it’s important to make sure you can comfortably afford the deductible amount if you need to make a claim.
Factors to Consider Before Choosing a Deductible
Selecting the right deductible is a personal decision and several factors should be taken into account:
- Financial Capacity
It’s essential to evaluate your financial situation before selecting a deductible. If you opt for a higher deductible, you may save money on premiums, but in the case of a claim, you will need to pay a larger amount upfront. Make sure that you can afford the deductible without straining your finances.
- Risk Tolerance
How much financial risk are you willing to take? If you prefer lower premiums and can comfortably manage the deductible in case of a claim, a higher deductible may work for you. On the other hand, if you want peace of mind knowing that you will pay a smaller amount upfront during a claim, a lower deductible might be the better choice.
- Claim Frequency
Consider the likelihood of filing a claim. If you rarely make claims, a higher deductible can save you money in the long run. But if you anticipate frequent claims (for example, with car insurance), a lower deductible may be more practical to avoid frequent out-of-pocket costs.
- Policy Type
The type of insurance policy you are purchasing will also influence the deductible you choose. For instance, health insurance and home insurance may have different deductible structures compared to car insurance. Evaluate the specifics of the policy before making a decision.
Common Misconceptions About Deductibles
Many people have misconceptions about how deductibles work. Let’s address some of the most common myths:
- “Higher Deductibles Always Save Money”
Not necessarily. If you frequently make claims, a higher deductible may end up costing you more in the long run than the premium savings.
- “The Deductible Only Applies to the First Claim”
Deductibles are generally applied to each claim, not just the first one. If you make multiple claims within a year, you may have to pay the deductible each time.
- “All Claims Have the Same Deductible”
Some policies have different deductible amounts for different types of claims. For example, a car insurance claim might have a different deductible compared to a health insurance claim.
Quick Note: Co-pay vs Deductible
A co-payment (co-pay) is different from a deductible. While a deductible is a fixed amount you must pay before insurance kicks in, a co-pay is a fixed percentage of the claim amount that you share with the insurer, often applicable after the deductible is met. Health insurance plans in India may include both.
The Bottomline
Understanding deductibles is crucial when purchasing any kind of insurance policy in India. A deductible is not just a number on your policy documents; it’s a key component that affects how much you will pay out-of-pocket in the event of a claim and the overall cost of your premiums. By selecting the right deductible, you can strike a balance between lower premiums and adequate coverage. Be sure to carefully assess your financial situation, risk tolerance, and the specifics of the policy before making a decision. With the right deductible, you can optimise your insurance plan to suit both your budget and your protection needs.
