Increasing the excess on your insurance can mean cheaper premiums, but it will also mean you pay out more if you need to make a claim. We discuss the pros and cons.
What is insurance excess?
Insurance excess is the amount you’ll need to pay out towards the cost of a claim before your insurer will make a contribution. For example if you made a claim on your pet insurance for the cost of a vet bill that came to £500, and you had an excess of £100, you would pay the first £100 and your insurer the other £400.
Insurers apply an excess to all kinds of insurance policies, from pet, car and home to travel and health. Most insurance policies will specify a standard excess set by your insurer, which is the minimum amount you will need to pay out towards a the cost of a claim.
This means you’ll almost always have to pay a certain amount towards a claim, whichever policy you choose. The reason for this unavoidable excess is to dissuade people from making fraudulent claims on their policies.
Most insurers will also offer you the option of adding a voluntary excess to your policy. This means that you can choose to add an additional excess on top of your compulsory excess, increasing the amount that you will need to pay when you make a claim.
Though the idea of voluntarily paying more towards your insurance claim may seem counter-intuitive, there are benefits that come with increasing your excess.
Why increase?
In many cases (though not all) a higher excess can mean cheaper premiums. With cheaper premiums you’ll be paying less to keep up your insurance cover, so your insurance will cost less in the long-run – as long as you don’t make a claim. By increasing the amount you are willing to pay to meet the cost of a claim, you are decreasing the amount your insurer will have to pay – and so you are ‘rewarded’ with cheaper premiums.
Increasing your voluntary excess in return for cheaper premiums may be a particularly appealing option if you have a history of no claims and think it unlikely that you’ll make a claim in the near future. However there’s no way of telling what will happen so you could find yourself in a position where you have to make a claim and are stuck with paying out more to meet the cost.
This is worth doing however if you will be able to comfortably afford to cover the excess in the event of a claim, for example if you have savings you can dip into. In this way you can benefit doubly from increasing your excess, by keeping some funds aside to cover excess in a savings account, while at the same time enjoying cheaper premiums.
Taking advantage of the opportunity to add voluntary excess to your policy can be a good idea to decrease your premiums, but only if you know you could afford to pay out the amount of your voluntary excess, plus the standard excess, in the event that you need to make a claim.
You would need to be able to afford the extra excess comfortably, otherwise setting it high won't be worth it. If it is so high you can’t afford to cover it, you’ll be put off making a claim on your insurance – which misses the point of paying out for insurance altogether.
What are the drawbacks of increasing my excess?
By increasing your excess to include a voluntary excess you are agreeing with your insurer that should you need to claim on your insurance policy, you will pay out this extra amount.
So if you have a standard excess on your home contents insurance policy of £200 and you agree to add a voluntary excess of £100 on top of this, you may secure cheaper premiums to keep up your cover – but if your home contents happen to be damaged by flood, fire, or some other catastrophe, you’ll have to pay out £300 to meet this cost rather than £200.
It’s also worth mentioning that in the case of car insurance, younger drivers (usually those under the age of 25) may need to pay an additional compulsory excess on top of the standard excess if they need to make a claim.
This additional ‘young driver’ excess is applied by many (although not all) insurers as younger drivers are perceived to be higher risk and therefore more likely to make a claim. As such insurers cover themselves by asking them to contribute more towards the cost of a claim than older drivers.
For example, a compulsory excess of £150 may be imposed on top of the standard excess of £200. In this case, adding an additional voluntary excess of £100 to this set amount may still get you cheaper premiums, but could be counter-productive as you will then be faced with paying out £450 in the event of a claim.
As with many aspects of insurance, making the decision whether or not to increase your excess is a gamble, based on risk. If you choose to increase, you are gambling lower premiums against having to pay out more to meet the cost of a claim. The decision will largely come down to whether or not you can afford to meet this extra cost should you have to.
