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What is a deductible in insurance?
What is a deductible in insurance Experienced insurance agents can easily convince clients to enter into insurance contracts with a deductible. The main argument in favour of buying such policies is their lower cost compared to classic insurance. The term is of French origin and means a benefit. Indeed, the insured can obtain more favourable contractual terms if he or she understands the effect of the instrument and can predict whether it will be a means of saving money or cause unforeseen expenses.
Deductible terms are valid either for a certain period or under specific circumstances. To make them truly favourable, you need to carefully study the insurance contract and understand the nuances of the instrument.
The essence and functions of the deductible
In professional terms, the term means a part of the loss that is covered not by the insurer but by the policyholder using their own funds in the event of an insured event.
This option is beneficial for both the insurance company and the policyholder. The insurer does not make payments for minor losses, does not spend money on their settlement, and saves on operating expenses.
The policyholder, depending on the amount of the deductible, chooses an acceptable policy price. The higher the amount of losses for self-coverage, the cheaper the policy. Hull insurance contracts with and without a maximum deductible differ in price by 30-50%. The situation is similar with travel insurance.
Another advantage for policyholders is time savings. The procedure for processing an insured event takes more than one day. It is justified to take this much time when the amount of compensation is large. If we are talking about a thousand or two hryvnias, it is worth comparing the financial and time components.
The deductible in car insurance encourages drivers to drive carefully and comply with traffic rules. After all, in the event of an insured event, part of the damage will have to be reimbursed by the driver. The use of the tool in car insurance is justified for drivers with a solid driving record, a careful driving style, and for owners of used cars. It is more convenient to repair minor damage to the car at your own expense than to initiate a compensation mechanism.
How the deductible is calculated
There are two types of non-compensated damage: in monetary terms and as a percentage of the amount of damage or the insurance limit. In the first case, the part that is not compensated does not depend on the amount of the loss and is fixed. In the second case, the deductible is linked to the amount of damage: the greater the damage, the greater the costs incurred by the policyholder.
Types and features of deductibles
The types of insurance instruments are specified in the contract. There are two options:
- Conditional - a benefit in which the insured undertakes to compensate for losses in the amount of a certain amount specified in the contract. If the loss exceeds this amount, the insurance company will reimburse it in full.
- Unconditional, or deductible, is a compensation procedure in which the insurer's payments are automatically reduced by the amount of the deductible.
Let's look at the examples.
The conditional deductible is UAH 1500. Losses after the insured event are estimated at UAH 1000. The insurer does not pay compensation to the insured because the amount of losses does not exceed the amount specified in the contract. In the same case, when the loss is estimated at UAH 3,000, the insurance company covers it in full.
The owner of a policy with an unconditional benefit of UAH 2000 has an accident. The cost of repairs was estimated at UAH 8000. The insurer will reimburse the difference of UAH 6000, and the client pays the rest of the money from his own wallet.
Conditional benefits are included in insurance contracts at the request of clients. In cases of high risk of minor damage, the option is mandatory.
There are less common options for non-collateral damage. If the indemnity amount changes with the accumulation of the number of insured events, we are talking about a dynamic deductible. The insurance company fully indemnifies losses for the first insured event. Upon the occurrence of such events, a certain amount is deducted from the payments. This option is common in hull insurance contracts.
The preferential deductible depends on certain conditions; it does not apply if an accident occurs in which the driver of another car is not to blame, but the insured.
Other types:
- high deductible, used in property insurance for real estate valued at amounts exceeding one hundred thousand dollars. Upon the occurrence of an insured event, the insurance company pays compensation in full, and after the property is restored, the insured pays the company the deductible;
- recourse, the essence of which is that the insurer compensates the client for all losses and then receives the deductible amount from the insured.
The types of damage described above that are not indemnified by the IC are designed to find acceptable options for both parties. The instruments can be combined or used separately.
Deductibles in different types of insurance
The deductible is applied in voluntary health insurance policies, motor third party liability insurance and motor hull insurance for travellers abroad.
Voluntary and compulsory motor insurance
Voluntary motor insurance policies provide for non-reimbursable damage in the event of "total destruction" and "theft". Its amount is quite high, up to 10%. Insurers set such rates on purpose to prevent owners from deliberately trying to break the car to get the full value for it.
Experts believe that for a car worth up to $15,000, the best option is a hull insurance contract with a 0.5% deductible upon the occurrence of an insured event. There is no point in overpaying for a zero deductible, as the insurance will initially have a higher cost. The decision to include the option in the contract is made individually based on financial capabilities with an understanding of the instrument and personal accident statistics.
The deductible in CMTPL is expressed as a percentage, cannot exceed 2% of the insurance limit, and applies exclusively to property damage.
Travel insurance
Travel insurance policies apply an unconditional deductible in monetary terms. Expenses within the selected amount, such as a visit to a doctor, hospital treatment, are paid by the client, while the rest are reimbursed by the insurance company. The reduction in costs for the insured at the initial purchase of the policy is 30-40%, compared to classic insurance. However, it is difficult to predict the potential costs of medical care abroad, and in case of complications, tourists will have to rely on their own funds.
Voluntary health insurance
This tool is used in health insurance, mainly to pay for treatment in private clinics. Limitations on payments can be conditional, unconditional, and temporary. Each option is beneficial for a certain category of clients. Conditional insurance benefits are chosen by young people who want to insure themselves against a serious illness. It is advisable for elderly people to take out a policy with unconditional benefits, as the likelihood that losses will exceed the agreed limit is high.
In health insurance, a temporary deductible is used, whereby the limitations on payments relate not to the amount of damage, but to the time of insurance services. This option is designed to combat fraudsters who guess or know for sure about their diagnoses.
The most favourable option is a zero deductible policy. It is expensive, but the services of professional medical specialists are not cheap either.
The deductible in insurance contracts is a convenient and economical tool. It reduces the cost of the policy and increases the level of customer confidence in insurance companies. It is important to choose an acceptable type and size of deductible, which will allow you to preserve values with maximum efficiency.
