What Is An Insurance Policy Excess

What Is An Insurance Policy Excess

Your insurance excess forms part of your policy terms and is designed to give you some control over your premiums by sharing some of the insurance risk with the policy holder. All standard insurance policies include an excess figure for each type of cover and, if a claim is made, this excess is deducted from the amount paid out by the insurance provider.

So, for example, if a home contents policyholder makes a claim for 1,000 following a burglary but has a 500 excess, the insurer may only pay out 500. The actual excess amount may depend upon the type of cover and it's terms and conditions and be applied to a particular claim or be an annual cap.

From the insurers point of view, the policy excess achieves two things. It allows them to offer customers the option to reduce their premiums in return for agreeing to a larger excess figure. In addition, the excess also limits the number of claims because, if a claim is relatively small, the customer may find they either wouldn't get any payout once the excess was deducted, or that the payout would be so small that it would leave them worse off once they took into account the loss of future no-claims discounts.

The most important thing to remember about an excess is that it is usually a flat rate rather than a proportion of the cover. Also, regardless of the size of a claim, the excess will be deducted from the final payout received by the policy holder which can reduce the benefit of submitting a smaller claim.

What level of excess applies depends on the insurer and the type of insurance. With motor insurance, many firms have a compulsory excess for younger drivers. The logic is that these drivers are most likely to have a high number of small value claims, such as those resulting from minor prangs.

With medical insurance, whether for a human or a pet, it is worth watching out for annual excess limits. Where these apply, the claimant may have to pay an excess every year for an ongoing claim. For example, where a health condition requires treatment lasting two or more years, the claimant would still be required to pay the policy excess even though only one claim is made.

How much impact an excess has in the event of a claim depends on the type of insurance. An example would be when making a claim on a contents insurance policy for various stolen items. The policyholder would have to weigh up the short term need to replace the lost items with the longer term cost of losing any no-claims discount accrued. Things differ with a motor insurance claim where the policyholder may have to find the excess amount from their own pocket to get their car repaired or replaced.

Though this isn't widely known, it is possible to take out a separate policy against having to pay the excess on cover from another insurer. This has to be done through a different insurer but works on a simple basis: by paying a flat fee each year, the second insurer will pay out a sum matching the excess if you make a valid claim. Prices vary, but the annual fee is usually in the region of 10% of the excess amount insured.

Like any type of insurance, it is vital to check the terms of excess insurance very carefully as cover options, limits and conditions can vary greatly. The excess insurer may simply pay out whenever your main insurer judges a claim to be valid, but they may instead have their own rules about exactly what is covered and what would invalidate a claim. You may also discover that there are rules restricting you to a certain number of claims per annum.