Wondering what is a deductible in the context of motor insurance? Motor insurance is a crucial aspect of owning and driving a vehicle in India. The main advantage of motor insurance is that it provides financial protection against damages caused to your vehicle, third-party liabilities, and personal injuries.
Motor insurance typically includes coverage for third-party liabilities, meaning it protects you against legal and financial obligations if your vehicle causes damage to someone else's property or injures another person. This coverage can be crucial in accident scenarios, where you may be held responsible for compensating the affected party.
When purchasing a motor insurance policy, it is essential to understand the concept of deductibles. Here, we will delve into the meaning of deductibles and explore the difference between Voluntary Compulsory Deductibles (VCD) and Compulsory Deductibles in the Indian context.
Understanding Deductibles
In car or bike insurance, a deductible is a predetermined amount the policyholder must pay towards a claim before the insurance company starts covering the remaining costs. It is the portion of the loss that the policyholder agrees to bear. Deductibles are commonly applied to own-damage claims, which involve damages to the insured vehicle. There are two types of deductibles - Compulsory Deductible and Voluntary Compulsory Deductible.
Compulsory Deductible: Compulsory deductible is a fixed amount specified by the insurance company in the policy. The policyholder must pay this deductible for each own-damage claim they file. The purpose of a compulsory deductible is to ensure that policyholders bear a certain level of risk and do not file minor or frivolous claims. The specific amount of the compulsory deductible varies depending on the type of vehicle and the insured declared value (IDV) of the vehicle.
Voluntary Compulsory Deductible (VCD): Voluntary Compulsory Deductible, as the name suggests, is an additional deductible amount the policyholder chooses to opt for voluntarily.
By selecting a VCD, the policyholder agrees to pay a higher deductible than the compulsory deductible. In return, the insurance company may offer a lower premium for the policy. The availability and amount of the VCD can vary across insurance providers, and it is typically offered as an option to policyholders.
Differences between VCD and Compulsory Deductible:
Voluntary Compulsory Deductible (VCD) | Compulsory Deductible | |
Definition | An additional deductible is chosen voluntarily by the policyholder | A fixed amount specified by the insurance company and mandatory for each own-damage claim |
Policyholder's Choice | Policyholder has the option to select or reject VCD | Policyholder has no control over the amount or existence of the compulsory deductible |
Impact on Premium | Opting for a higher VCD may result in a lower premium | No direct impact on the premium amount |
Purpose | Allows policyholders to have more control over their premium and deductible balance | Ensures policyholders bear a minimum level of risk and discourages frivolous claims |
Flexibility | VCD amount can vary across insurance providers | The insurance company fixes the compulsory deductible amount |
Example | Choosing a VCD of Rs.5,000 along with a compulsory deductible of Rs.2,000 | Having a compulsory deductible of Rs.2,000 without any voluntary component |
How deductibles affect motor insurance claims
Deductibles play a significant role in motor insurance claims, affecting the policyholder's out-of-pocket expenses and the insurance company's liability. Let's explore how deductibles impact the claims process:
Claim threshold:
Deductibles act as a claim threshold, indicating the minimum loss amount the policyholder must incur before filing a claim. For example, if the deductible is Rs.2,000, and the total repair cost is Rs.4,500, the policyholder will bear the deductible amount (Rs.2,000). At the same time, the insurance company will cover the remaining Rs.2,500.
Financial responsibility:
Deductibles place financial responsibility on the policyholder. By requiring policyholders to contribute towards the claim amount, deductibles discourage the submission of minor or low-value claims. This helps insurance companies manage their claim loads and prevents an increase in premiums due to numerous small claims.
Impact on premiums:
Choosing a higher voluntary deductible can lower premium costs. Insurance companies view policyholders who opt for higher deductibles as individuals willing to take on more risk. As a result, they may offer lower premiums as an incentive. However, policyholders should carefully evaluate their financial situation and ability to bear higher deductibles before selecting this option.
Effect on claim settlement:
The deductible directly affects the claim settlement. After assessing the claim, the insurance company subtracts the deductible from the total admissible claim amount. The remaining balance is what the insurer will reimburse the policyholder. It is essential to consider the deductible amount when estimating the potential claim payout.
Cumulative Deductibles:
In some cases, deductibles can be cumulative, especially when multiple claims are filed within a specific period. For instance, if a policy has a cumulative deductible of Rs.5,000 and two separate claims of Rs.3,000 and Rs.2,500 are filed, the policyholder would need to pay the cumulative deductible of Rs.5,000 before receiving any reimbursement.
Summing up
Understanding deductibles is crucial when purchasing a motor insurance policy in India. Compulsory deductibles are fixed amounts specified by the insurance company for each own-damage claim, whereas voluntary compulsory deductibles are additional deductible amounts chosen by policyholders voluntarily.
Policyholders can potentially lower their premiums by opting for a higher voluntary deductible. In case of a claim, it is important to consider the deductible options offered by different insurance providers to strike the right balance between excellent affordability and out-of-pocket expenses.
Remember, when it comes to understanding the benefits of motor insurance, knowledge is power. By familiarising yourself with the terms and conditions, such as deductibles, you can make informed decisions and ensure adequate protection for your vehicle as per the requirements of the Motor Vehicle Act, 1988.
