Deductible and Voluntary Deductible – when buying insurance, you would encounter either/both these terms, especially when you compare insurance plans or go through a product description, leaflet or brochure. These terms have high monetary implication either on the premium you pay, or the insurance cover/benefit you get. So it is rather important to understand what they mean.
These terms are common to several types of insurance products – e.g. Overseas Travel Insurance, Health Insurance, Car Insurance, Bike Insurance and Student Travel Insurance, among others. We will take these definitions one by one and use examples to explain. If you want to save money on your insurance premiums, the next 3 minutes of reading should really benefit you.
Both Deductible and Voluntary Deductible are terms related to the claim.
Deductible is the amount that the insurance company will ‘deduct’ before it pays you the claim.
A deductible is also called compulsory or mandatory deductible because it is built into the product and you cannot opt out of it. It is also sometimes called out-of-pocket expense because the claimant has to pay this amount first from her/his pocket, and then claim the rest of the bill amount from the insurance company. It is like a threshold after which the insurance company will pay (up to the maximum limit of cover). It can also be in terms of time, not necessarily in money terms.
Let’s take an example of Health Insurance (but this is applicable similarly for other insurance products as well). Amit takes a policy which provides a maximum limit of Rs. 3 lakhs for hospitalization with a deductible of Rs. 10,000. When Amit was hospitalized, his bill came to Rs. 75,000. So, the insurance company will pay him Rs. 75,000 minus the deductible of Rs. 10,000 = Rs. 65,000. The balance Rs. 10,000 will have to be paid by Amit. Simple, right? Here are some more examples to illustrate how it works.
Plans with deductibles have lower premiums. Here’s why. When an insurance company charges a deductible, a lot of ‘improper’ claims are deterred. That’s because the claimant has to bear the cost of the deductible first, only then the rest of the bill is paid by the insurance company. Also, the insurance firm ends up pay only claims wherein the total bill is more than the deductible amount, and an amount that is lower to the extent of the deductible. That means savings to the insurance company on low value claims, and these savings are passed on to the customer as lower premiums. You cannot find out the impact of the reduction in premium, because it is already priced-in. What you see is only the reduced premium.
Impact of a Deductible: If you are healthy and not worried about getting small claims covered, don’t worry too much about a health insurance deductible and use the benefit of lower premium. In any case, the deductible amounts are a very small fraction of the maximum limit of claim allowed for a particular benefit. Similar logic can also be applied to other products such as Overseas Travel Insurance, Car Insurance, Bike Insurance, Student Travel Insurance, etc.
Voluntary Deductible is over and above the compulsory/mandatory deductible. It is completely optional for the buyer and is applicable only at the time of buying a new policy or renewing it. A voluntary deductible is a (further) commitment of contribution from your side if there is a claim.
Voluntary Deductible can greatly reduce your premiums. You can choose any level of contribution within a specified range. e.g. Let us assume Ravi is renewing his motor car insurance policy (applies even if he is buying a new car/bike insurance policy). The insurance company he has chosen offers him the following options for Voluntary Deductible.
Notice that higher the voluntary deductible you agree to pay, higher is the discount, lower is the premium!
If Ravi feels that his driving is good, and has a history of no claims, he can choose to go for a deductible. If his record is spotless, he could choose the highest deductible of Rs. 12,000 and get a hefty 35% discount in his car insurance premium! This means that if there is a claim, he will pay the bill amount up to Rs. 12,000 and anything above that will be paid by the insurance company up to the maximum limit allowed.
There you are. We hope the concepts of and differences between Deductible and Voluntary Deductible are understood. Make sure you use it to your advantage when buying your next insurance policy.
For your benefit, MintWise Online Insurance uses the symbol (a minus sign inside a circle) to show a Deductible or Voluntary Deductible for all the insurance products compared in the website.