Choosing an insurance policy has primarily two key nuances. First is the insurance premium and the second is the total insurance coverage. Policy holders always aim to pay as less a premium as they can, and in return get the maximum coverage.
However, if one wants to pay relatively lower premium by forgoing a portion of coverage then one can do so by choosing a higher deductible.
Let us understand what exactly is this and how it impacts the policy holder:
A deductible is a portion of the claim that the insurance company does not pay. It is either a percentage of the claim, or a flat amount in each claim, which policy holder has to foot themselves.
A deductible is a compulsory clause in some of the insurance policies. Some policies permit policy holders to opt for a voluntary deductible for a premium discount. This means you have to pay a higher amount at the time of availing a claim.
Policies that cover deductibles
Deductibles are usually seen in health, motor and property policies that are indemnity policies. In other words, they reimburse your actual expenses.
The other policies such as life insurance and annuity policies, critical illness, personal accident, don’t have deductibles.
Abhishek Misra, chief executive officer and principal officer, Bonanza Insurance, says it is good for the policy holders to opt for it if they are sure that they won’t need a higher claim.
“It generally happens when the past history of policy holder indicates that no insurance claim was made. Let’s say the insurance premium is ₹20,000 for a coverage of ₹4 lakh. If the policy holder believes that he would, in all likelihood, not need to take the claim for entire policy coverage, then he can take voluntary deductible and cut down on premium to say, ₹15,000,” he said.
Naval Goel, Founder and CEO of PolicyX.com, says opting for voluntary deductible is prudent when the chances of applying for a claim are low.
"If customers feel that they can afford a certain amount of claim and want to reduce their premium, they can opt for deductibles. It sometimes makes sense because it reduces the premium payable and the chances of applying for a claim are very low, so the deductible amount might not impact them unless there is a claim," Goel said.
Clearing the ambiguity
Although deductible sounds like a deduction but it is, in fact, an amount that customer has to pay from their own pocket. Likewise, there is another insurance term which might sound ambiguous. It is constructive total loss.
This is usually invoked when a vehicle is totally damaged. The car could have been drowned in a local lake or river, or perhaps got crushed under a tree during floods.
So, term doesn’t imply that the motor insurance company is refusing to bear the insurance claim. What it means is that it is too costly to repair the vehicle, and hence, the insurer will simply pay you the vehicle’s cost.