Insurance is a strong defense mechanism- it cushions people and companies against the unpredictability of life. Whether it’s a car accident, a hospital bill, or a damaged home, insurance offers financial relief when things go wrong. Of late, the insurance industry of India has gone through a ‘digital revolution’. As awareness and access increase, individuals are increasingly buying policies to cover health, vehicles, property and even travel.
However, amidst the technical jargon and fine print, there is one term which is often misunderstood by policyholders: the term ‘excess’ or ‘deductible’. Have you ever made a claim and received the response that there is a part of the loss you need to bear? This is known as ‘excess’, a very important but often misunderstood term of insurance.
What does excess in insurance mean? In this blog, we will discuss this in detail, in an Indian context. As a new insurance customer or someone who wants to make the best use of his or her policy, knowing about excess can save you money and help you make informed coverage decisions.
So, let’s get into it and unravel this important component of insurance, with clarity.
What is Excess in Insurance?
Excess, which can also be referred to as a deductible, is the amount that a policyholder is supposed to pay out of pocket before the remaining amount of the claim can be covered by the insurance company. It is a type of cost sharing that minimises trivial and groundless claims and promotes accountability among policyholders.
Simply put, excess is what you pay out of pocket to each claim.
Excess Should not be Confused With Co-payment
Although both excess and co-payment are out-of-pocket expenses, they are different in the way they are applied:
- Excess: A specified sum, or minimum contribution to each claim.
- Co-payment: The percentage of the amount of the claim (typical of health insurance).
As an illustration, suppose your vehicle repair cost is Rs 15,000 and the excess on your policy is Rs 2,000, you pay 2,000 and the insurer pays 13,000.
Types of Excess in Insurance
Depending on the nature of the policy and the risk profile of the insured, the insurers provide various forms of excess clauses. So what are the key categories? Let’s explore:
1. Compulsory Excess
This is an obligatory deductible as stipulated by the insurer or the regulator. This amount cannot be eliminated or diminished. Typically, it is used in:
Motor insurance: For private cars, the IRDAI mandates a fixed compulsory excess. For example, it’s typically ₹1,000 for cars below 1500cc and ₹2,000 for those above 1500cc.
2. Voluntary Excess
This is an optional excess and can be chosen by the policyholder during policy issuance or renewal. In return for selecting a higher voluntary excess, the insurer can offer a discounted premium.
Voluntary excess is an appropriate choice for people who:
- Drive safely or seldom
- Are able to cope with minor out-of-pocket costs
- Have a desire to cut down their yearly insurance premium
However, do keep in mind that greater voluntary excess = greater contribution in a claim.
3. Imposed Excess
This is an excess imposed by the insurer based on your risk profile. It is normally applied when:
- The insured has made a lot of claims in the past
- The area is prone to insured perils such as theft or accidents
- The insured asset or vehicle is deemed as high-risk
As opposed to voluntary excess, the imposed excess cannot be negotiated.
4. Franchise Excess (Less Common in India)
In this type of excess, the insurer will pay the entire claim amount in case of a loss, only when it surpasses a particular limit. In case the loss is less than the limit, the insurer does not pay anything. This type of excess is rare in Indian retail insurance but may be found in certain corporate policies.
How Excess Works: Real-Life Examples
Let’s break it down with examples to understand how excess affects claim settlement.
Example 1 – Motor Insurance (Compulsory + Voluntary Excess)
- Total damage repair: ₹25,000
- Compulsory excess: ₹1,000
- Voluntary excess: ₹3,000
- Final claim amount: ₹25,000 – ₹1,000 – ₹3,000 = ₹21,000
You pay ₹4,000. The insurer pays ₹21,000.
Example 2 – Health Insurance (Top-up Plan with Deductible)
- Hospital bill: ₹1.5 lakh
- Top-up plan deductible: ₹1 lakh
- Insurer pays: ₹50,000
Only claims above the deductible are paid.
Understanding your excess in monetary terms can help you plan finances better.
Excess in Different Insurance Types in India
Excess is treated differently in different categories of insurance. This is how it goes:
1. Motor Insurance
- IRDAI has made compulsory excess mandatory in this type of insurance.
- The voluntary excess can reduce premiums by up to 35 percent.
- Typically applies on a per-claim basis-be it for accidental damage or theft.
2. Health Insurance
- Base insurance policies can include co-pay, but not excess.
- Top-up or super top-up insurance policies often use a deductible (similar to excess).
- Depending on the particular insurance plan, deductibles can range from ₹1 lakh to ₹10 lakh
3. Travel Insurance
- Excess is applicable to small claims such as losing baggage, trip delay, or medical OPD.
- Excess is commonly capped to certain pre-specified limits.
4. Home Insurance
- A standard excess can apply to fire, burglary or electrical damage (e.g., 5 per cent of the claim or 10,000 rupees–whichever is greater).
- Often overlooked but can become critical during natural calamities.
Impact of Excess on Insurance Premium
A higher excess will lower your premium. Why? This is due to the fact that you will accept to bear more financial burden in the event of a claim.
Here’s how it goes:
| Voluntary Excess | Premium Discount (Approx.) |
| ₹2,500 | 10% |
| ₹5,000 | 15% |
| ₹7,500 | 20% |
| ₹15,000+ | 25–30% |
Don’t overcommit. A ₹15,000 excess only makes sense if you are sure you can afford that in the event of a claim.
What to Consider Before Choosing an Excess
The choice of excess should not be random. The following is what you should consider:
- Affordability: Is it easy to pay the excess amount in cases of an emergency?
- Risk Exposure: How often do you claim insurance? Rare claims = higher excess may work.
- Value of Insured Asset: The value of high-value items = the greater the repair cost could be = excess becomes more meaningful
- Driving or Usage Habits: Drivers who drive carefully or who are in low risk environments can justify higher excess.
- Cash Flow: A low excess is safer when you are low on liquidity.
Whenever possible, it is always good to have a proper balance between premium savings and financial convenience.
Regulatory Guidelines on Excess in India
The Insurance Regulatory and Development Authority of India (IRDAI) in India has standardised some aspects related to excess:
- Compulsory excess is mandatory in motor insurance, and must be declared beforehand.
- Voluntary excess cannot be imposed by any insurer without the consent of the policyholder.
- Deductibles have to be described clearly in the policy wordings.
Further, IRDAI promotes transparency in disclosure of insurance products. Therefore, ensure that before you sign on the dotted line, you always check the policy schedule and terms and conditions.
Final Thoughts:
Excess in insurance may appear as a small thing but it will have a significant impact on your claims, insurance premiums and on your mind. It is not just a figure but a common obligation between you and your insurance provider.
By learning about the way excess operates, the types that are available and when to choose a higher deductible, you can make more informed decisions about your finances and insurance. It is important not to ignore the excess clause when purchasing your first car insurance or even when reviewing your corporate health top-up plan. It may be the difference between a problem-free claims settlement and an unpleasant financial surprise.
Next time, therefore, when your insurance company mentions deductibles or excess, you will not merely nod in understanding–you will know precisely what it means and how to make it work to your own benefit.
