The idea behind insurance is fairly simple; it’s an ongoing gamble where you only “win” money once you “lose” the game. Put in another way, it allows you to pay a fee so that a different company will foot the bill when particular circumstances are met (like crashing your car). Over time the principals & methodology have become more complex, giving the buyer different options. One of these options is the excess, or deductible.
The excess is the amount that you are expected to contribute towards an insurance claim. In a simple situation, you might have to pay $500 of a $10,000 bill to repair a wall you ran into. Some insurers will demand you pay them an excess, and then they pay the bill, while other insurers will pay for most of the bill, and you pay the remaining amount.
The basic excess is almost always listed on your insurance schedule, with some less common excesses also listed in the Product Disclosure Statement (“PDS”). Now insurers like excesses because it can act as a deterrent. Depending on the size of the excess, it means you won’t lodge a claim for smaller problems that are easier to fix person to person, but the insurance can still be there to step in for large or serious issues.
This gets interesting when an insurer offers “flexible excesses” – an excess that can be increased or decreased depending on what you want. The larger an excess, the larger a discount the insurer will apply due to the deterrent factor. Increasing your excess can prove to be an effective way to help lower that upfront insurance premium.
The most important thing to keep in mind though is that an excess means you will have to pay it when something goes wrong. Sometimes it is in your interest to have a higher annual premium for a lower excess, and at other times it will be in your interest to have a low annual premium with a higher excess.
Overall, although the excess is there to help the insurers limit the number of claims they process, you can make the most of its benefits by carefully balancing the excess and your premium discount.