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.

Example

If you claim on your pet insurance for the cost of a 500 vet bill, 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, including:

Most insurance policies will specify a standard excess set by your insurer.

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 is where you can add an additional excess on top of your compulsory one, 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 a higher excess can mean cheaper premiums. This means your insurance will cost less in the long-run - as long as you don't make a claim.

Increasing the amount you are willing to pay , decreases the amount your insurer will have to pay if you make a claim - so you are 'rewarded' with cheaper premiums.

Increasing your voluntary excess in return for cheaper premiums may be a appealing if you have a history of no claims and think it's unlikely that you'll make a claim anytime soon.

However there's no way of predicting the future 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 if you can afford to cover the excess in the event of a claim, for example if you have savings you can dip into. 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.

If you can't afford the extra excess comfortably, setting it high won't be worth it. If 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.

Example

If you have a standard excess on your home contents insurance policy of 200 and you add a voluntary excess of 100, your premiums may be cheaper - but if you need to claim, you'll have to pay out 300 to meet this cost rather than 200.

For 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.

'Young driver' excess is applied by some insurers as younger drivers are perceived to be higher risk and more likely to make a claim. Insurers cover themselves by asking them to pay more towards the cost of a claim.

For example, a compulsory excess of 150 may be added on top of a standard excess of 200. Adding a voluntary excess of 100 may decrease your premiums, but could be counter-productive as you will be faced with paying out 450 if you make a claim.

Deciding on whether or not to increase your excess is a gamble, based on risk. by increasing it, 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.