Many drivers find the details of car insurance confusing. One area that often causes questions is the ‘excess’. This is the amount you agree to pay towards a claim before your insurer pays the rest.
Understanding how excess works is key to managing your car insurance costs and ensuring you’re not caught out if you need to make a claim. It’s not just about the price of your policy; it’s about what you’ll pay when things go wrong. Here’s what you actually need to know.
Understanding Car Insurance Excess
Car insurance excess is the amount of money you agree to pay towards a claim. It’s a fundamental part of your policy. Think of it as your contribution to any repair or replacement costs. Your insurer then covers the remaining amount. For example, if your car needs $3,000 in repairs and you have a $500 excess, your insurer will pay $2,500.
There are two main types of excess: compulsory and voluntary. The compulsory excess is set by your insurance provider. It’s a fixed amount that cannot be changed. The voluntary excess, however, is an amount you choose. You can add this to the compulsory excess. This choice can affect your overall insurance premium.
If I were in this situation, I’d want to understand the exact figures for both compulsory and voluntary excess on my policy. This clarity helps me know my exact out-of-pocket cost if I ever need to make a claim.
Why Excess Amount Matters for Your Premium
The amount of voluntary excess you choose has a direct impact on your car insurance premium. Generally, the higher the voluntary excess you agree to, the lower your annual insurance cost will be. This is because you are taking on more financial risk yourself. Insurers see this as a reduced risk for them, so they offer a lower premium.
However, this strategy comes with a significant trade-off. If you make a claim, you will have to pay the total excess amount. This is the sum of both the compulsory and voluntary excess. If you’ve set your voluntary excess very high, this could be a substantial amount of money. It might even make a claim impractical if the repair cost is low.
For instance, if you have a $1,000 voluntary excess and a $200 compulsory excess, your total excess is $1,200. If the repair cost is only $800, it would not be financially sensible to make a claim, as you would be paying more than the repair cost yourself. This is a common misunderstanding; people focus on lowering the premium without fully considering the potential cost when a claim arises.
Younger drivers, in particular, often struggle with this concept. Research shows that only 17% of drivers aged 18 to 24 fully understood compulsory excess, and 23% understood voluntary excess. This lack of understanding can lead to setting an excess that doesn’t suit their financial situation. In contrast, drivers over 65 showed much higher comprehension, with 74% understanding voluntary excess and 73% understanding compulsory excess.
My first move would be to check my policy documents to see the exact figures for both compulsory and voluntary excess. This helps me understand my potential out-of-pocket expense immediately.
Common Mistakes When Setting Car Insurance Excess
Choosing an Excess You Cannot Afford
One of the most significant mistakes people make is setting their voluntary excess at a level they cannot actually afford to pay. While a higher excess can lead to lower premiums, it’s crucial to ensure that the amount is manageable. If you can’t afford to pay your excess when you need to make a claim, your insurance policy may not provide the full benefit you expected. This can leave you in a difficult financial position.
The voluntary excess should be an amount that you are comfortable paying from your own funds if your car sustains damage. It’s a practical consideration that many overlook in favour of a cheaper upfront cost.
Not Understanding the Total Excess
Another common error is not realising that the total excess payable is the sum of both the compulsory and voluntary amounts. Some drivers might focus solely on the voluntary excess they set, forgetting about the compulsory portion that the insurer adds. This means the actual amount you’ll pay is higher than you might have initially thought. This can lead to unexpected costs when a claim is made.
Ignoring the Impact on Low-Value Claims
Some drivers don’t consider how their chosen excess affects small claims. If the cost of repairs is relatively low, it might be less than your total excess. In such cases, making a claim could mean paying more than the actual repair cost. This can make the insurance claim feel pointless. It’s important to consider the typical cost of minor repairs for your vehicle and compare it to your total excess.
If I were in this situation, I’d want to avoid setting an excess that makes small claims uneconomical. I’d aim for a balance that offers some premium saving without making minor repairs unaffordable to claim for.
Failing to Review Excess Annually
Your financial circumstances can change over time. What was an affordable voluntary excess a few years ago might not be now. Similarly, your risk profile might change. For example, if you’ve had a claim-free period, you might be able to negotiate a lower excess or a better premium. Not reviewing your excess annually means you could be missing out on potential savings or paying more than necessary.
| Age Group | Understanding Compulsory Excess | Understanding Voluntary Excess |
|---|---|---|
| 18-24 years | 17% | 23% |
| Over 65 years | 73% | 74% |
Choosing the Right Voluntary Excess for You
Assess Your Financial Resilience
The most crucial step in choosing your voluntary excess is to honestly assess your financial situation. How much money could you comfortably afford to pay out of pocket if you needed to make a claim? Consider your savings, your monthly budget, and any other financial commitments. If you have a substantial emergency fund, you might be able to afford a higher voluntary excess, which could significantly reduce your annual premium. Conversely, if your finances are tighter, a lower voluntary excess might be the safer, albeit more expensive, option.
My approach would be to look at my savings. If I had enough saved to cover a $1,000 excess comfortably, I might consider setting it that high to reduce my premium. If not, I’d aim for a lower figure.
Consider Your Vehicle’s Value and Repair Costs
The type of car you drive also plays a role. If you drive an older, less valuable car, the cost of repairs might be lower. In this scenario, a very high voluntary excess might mean you’re paying more than the car is worth in repairs. For high-value or performance cars, repair costs can be significantly higher, and a higher excess might be more justifiable to secure a lower premium. It’s worth researching typical repair costs for your specific make and model.
If you’re looking to protect your vehicle from theft or damage, a dash cam can be a useful addition. Models like the Garmin Dash Cam X310 offer 4K recording and GPS, which can be invaluable in documenting incidents.
Evaluate Your Driving Habits and Risk
Think about your driving habits and the risks you face. Do you drive long distances daily? Do you live in an area with high crime rates or a lot of traffic? If you believe you’re at a higher risk of making a claim, you might want to opt for a lower voluntary excess. This ensures that if an incident occurs, your out-of-pocket expense is minimised. Conversely, if you’re a very careful driver with a low-risk profile, you might feel confident choosing a higher excess.
For added security, a steering wheel lock like the Stoplock Steering Wheel Lock can deter thieves, potentially reducing your risk of needing to make a claim in the first place.
Compare Quotes with Different Excess Levels
When shopping for car insurance, don’t just compare quotes for a single excess amount. Most comparison sites and insurers allow you to adjust the voluntary excess. Try getting quotes with several different voluntary excess levels, for example, $300, $500, and $1,000. This will clearly show you the premium savings associated with each level. You can then make an informed decision based on what offers the best balance between premium cost and your affordable claim amount.
Frequently Asked Questions about Car Insurance Excess
What is the difference between compulsory and voluntary excess? ▾
How does voluntary excess affect my car insurance premium? ▾
What happens if my repair cost is less than my excess? ▾
Can I change my excess amount after taking out the policy? ▾
Is a higher voluntary excess always better? ▾
Choosing the right car insurance excess is a balancing act. It involves understanding your financial capacity and the potential costs of claims. By carefully considering both compulsory and voluntary excess, you can make a more informed decision that suits your needs and budget.
If this was useful, you might also want to read Car Insurance Excess: How Much Is Too Much? Why In The UK.
Sources and Further Reading
Drivers confused by car insurance excess: how to set the right amount. Which.co.uk, 2023.
Understanding Car Insurance Excess. OurInsuranceWorld.com.
Essential Tips for Car Insurance in the UK When Renting a Vehicle — This article provides helpful context on insurance considerations when driving different vehicles.
Car Insurance Excess: How Much Is Too Much? Why In The UK — This post delves deeper into the practicalities of excess amounts for UK drivers.
