An insurance policy excess is a cover feature designed to give you some control over your premiums by sharing some of the insurance risk with the policy holder. A standard insurance policy will have an excess amount for each type of cover and, if a claim is made, this excess is deducted from the amount paid out by the insurance provider.
As an example, if a home contents policyholder makes a claim for £2,000 for belongings stolen in a burglary but the home insurance policy has a £1,000 excess, the provider could pay out just £1,000. The precise excess amount may depend upon the type of cover and it's small print and be applied to a particular claim or be an annual limit.
A policy excess serves two main purposes for insurance companies. It gives the customer the ability to have some level of control over their premium costs in return for agreeing to a larger excess figure. It also reduces the amount of potential claims because, if damages are small, the customer may find they either wouldn't get any payout once the excess was deducted, or that the payout would be so small that it would leave them worse off once they took into account the loss of future no-claims discounts.
The most important thing to remember about your insurance excess is that it is usually a flat rate rather than a proportion of the cover. The full excess figure will be deducted from the payout regardless of the size of the claim. This means the excess has a disproportionately large effect on smaller claims.
The level of excess that applies to your policy depends on the insurer and the type of insurance. For example, many car insurance providers have a complusory excess for young drivers as they are more likely to claim on their policies.
With medical insurance, whether for a human or a pet, it is worth watching out for annual excess limits. This can mean that the policyholder is liable for the agreed excess amount every year for as long as a claim continues for an ongoing medical condition. For example, where a health condition requires treatment lasting two or more years, the claimant would still be required to pay the policy excess even though only one claim is made.
The effect of the policy excess on a claim amount is related to the cover in question. For example, if claiming on a home insurance policy and having the payout reduced by the excess, the policyholder has the option of simply absorbing some of the replacement costs and not replacing all of the stolen goods. This leaves them without the replacements, but doesn't involve any expenditure. In the case of a medical or motor claim, the policyholder will usually have to actually spend the cash which makes up the amount covered by the excess.
One little known way to reduce some of the risk posed by your excess is to insure against it using an excess insurance policy. Offered by specialist insurers for a flat fee of around 10% of the excess being covered, this insurance will pay out an amount equal to youir policy excess should you ever make a claim on it.
When considering such a policy, it is very important to check the terms and conditions carefully. The secondary insurer may simply pay out whenever your main insurer judges a claim to be valid, but they may instead have their own rules about exactly what is covered and what would invalidate a claim. You may also discover that there are rules limiting you to a certain number of claims per annum.
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