Deductible vs. Excess

Attribute	Deductible	Excess
Definition	The amount of money that an insured person must pay before an insurance company will cover the remaining costs.	The amount of money that an insured person must pay towards a claim before the insurance company starts to cover the remaining costs.
Application	Applies to various types of insurance policies, such as health insurance, auto insurance, and property insurance.	Primarily used in property and casualty insurance policies, such as home insurance and car insurance.
Amount	Can vary depending on the insurance policy and the specific terms and conditions.	Can vary depending on the insurance policy and the specific terms and conditions.
Payment	Paid by the insured person directly to the insurance company.	Paid by the insured person directly to the insurance company.
Effect on Premium	Higher deductibles generally result in lower insurance premiums.	Higher excess amounts generally result in lower insurance premiums.
Claim Coverage	Insurance coverage starts after the deductible amount has been paid.	Insurance coverage starts after the excess amount has been paid.
Frequency	Usually applies per policy period or per claim.	Usually applies per claim.

Introduction

When it comes to insurance policies, two terms that often confuse people are "deductible" and "excess." Both are important concepts in insurance, but they have distinct differences. In this article, we will explore the attributes of deductible and excess, their definitions, how they work, and their implications for policyholders.

Definition

A deductible is the amount of money that a policyholder must pay out of pocket before their insurance coverage kicks in. It is a fixed amount specified in the insurance policy. On the other hand, excess refers to the amount that the policyholder agrees to pay towards a claim, over and above the deductible. It is usually expressed as a percentage of the claim amount or a fixed sum.

Function

The primary function of a deductible is to discourage policyholders from making small or frivolous claims. By requiring policyholders to pay a portion of the claim, insurance companies can reduce administrative costs and prevent the abuse of insurance policies. Deductibles also help to keep insurance premiums affordable by shifting some of the financial responsibility to the policyholder.

On the other hand, the function of an excess is to protect insurance companies from excessive claims. By setting an excess amount, insurers ensure that policyholders have a financial stake in the claim. This encourages responsible behavior and discourages unnecessary claims. Excess also helps insurers manage risk and maintain profitability.

Calculation

Deductibles are typically fixed amounts specified in the insurance policy. For example, if you have a car insurance policy with a $500 deductible and you make a claim for $2,000, you would be responsible for paying the first $500, and the insurance company would cover the remaining $1,500.

Excess, on the other hand, can be calculated in different ways. It can be a fixed amount, such as $200, or a percentage of the claim amount, such as 10%. For instance, if you have a home insurance policy with a 10% excess and you make a claim for $10,000, you would be responsible for paying $1,000 (10% of $10,000), and the insurance company would cover the remaining $9,000.

Implications for Policyholders

One of the key implications of a deductible for policyholders is the impact on their out-of-pocket expenses. Higher deductibles mean that policyholders have to pay more before their insurance coverage applies. While this can result in lower insurance premiums, it also means that policyholders bear a greater financial burden in the event of a claim. Therefore, it is important for policyholders to carefully consider their financial situation and risk tolerance when choosing a deductible amount.

Similarly, the excess amount chosen by policyholders can have financial implications. A higher excess means that policyholders will have to pay more towards a claim. This can be a way to reduce insurance premiums, but it also means that policyholders need to have sufficient funds available to cover the excess amount in case of a claim. It is crucial for policyholders to strike a balance between a manageable excess and affordable premiums.

Insurance Types

Deductibles and excesses are applicable to various types of insurance policies, including auto insurance, home insurance, health insurance, and more. In auto insurance, deductibles are commonly used to determine the policyholder's financial responsibility in case of an accident or damage to the vehicle. Home insurance policies often have both a deductible and an excess to cover different types of claims, such as fire, theft, or natural disasters.

Health insurance policies also utilize deductibles and excesses to manage costs and encourage responsible healthcare utilization. Policyholders may have to pay a deductible before their health insurance coverage begins, and they may also have an excess for certain medical procedures or treatments. These mechanisms help control healthcare expenses and prevent unnecessary claims.

Conclusion

In summary, deductibles and excesses are important components of insurance policies that determine the financial responsibility of policyholders. While deductibles are fixed amounts that policyholders must pay before insurance coverage applies, excesses are additional amounts that policyholders agree to pay towards a claim. Both mechanisms serve to manage risk, reduce administrative costs, and maintain affordable premiums. Policyholders should carefully consider their financial situation and risk tolerance when choosing deductible and excess amounts to ensure they strike the right balance between coverage and affordability.