The process of taking out an insurance policy usually involves contacting an insurer for a quote, signing a contract, and paying monthly premiums. Your contract and premiums are usually tailored to your risk profile, which takes into account demographic and personal information such as your age, experience, previous claims or incidents, and information regarding your asset. When you do file a claim, you will have to contact your insurer with the relevant information and documents on hand.
Your insurer will then arrange for replacements or repairs, however, you will first be asked to make an excess payment. This excess payment amount can also depend on your risk profile; it is the uninsured portion of your loss that you are liable to pay for before your insurer pays out. Having an excess amount can give you a sense of responsibility and deter you from claims for small accidents and damages.
Depending on your risk profile and insurance policy, you may have to pay a specific type of excess. Be sure to check the terms and conditions of your excess payment as this may give you some insight as to what may drive the excess amount up or lower your payment. For example, if you are under 25 and take out car insurance you may be subject to a larger excess amount because you are perceived as a higher risk individual.
All insurance policies have a compulsory excess amount that is stipulated in your insurance contract. Additionally, you can voluntarily increase this amount and pay a higher overall excess.
Your excess payment can affect your monthly premiums; if you agree to pay a higher excess amount your monthly premiums can be lowered. Similarly, if you agree to pay only the minimum compulsory excess amount in the event of a claim, your monthly premiums will increase. Both options have their pros and cons; whether you should pay voluntary excess or not depends on your financial situation, goals, and the likelihood of needing to make a claim.
It’s easy to save some money every month by increasing your excess amount, however, you should be prepared to pay the excess amount in full in the event of a claim. Conversely, paying a high monthly premium can afford you some leeway during an emergency as you won’t have to pay a large excess to make a claim.
Besides a compulsory and voluntary excess, you may be subject to a special excess or age and experience related excess. These types of excesses are dependent on your insurance policy, and demographic information.
One simple way to lower your excess is to increase your monthly premiums, however, everyone may not be in the financial position to do this and it may require some additional budgeting.
Another way to lower your excess is to improve your risk profile. You can achieve this by maintaining your assets so that they do not need to be repaired or replaced as often. Depending on the asset, you can try to practice better habits such as driving within the speed limit and, avoiding dangerous high-crime zones.
Some excess amounts can’t be avoided though, such as age and experience related excess payments. If you are under the age of 25 or don’t have much experience driving, you may not be able to avoid a high excess. Luckily, this can be resolved in a few years by displaying good, safe behaviour and limiting claims. Another factor that increases your excess amount is the number of claims you make. If you make many claims in one year, you may find your excess amount increasing as you are now a greater actuarial risk for your insurer.
If you’re paying premiums every month and still have to pay a hefty excess to claim; you may be wondering if having insurance is even worth it. The short answer is: yes! Your insurance policy serves as a financial cushion during accidents and emergencies. The amount you pay in excess will usually be less than the amount your insurance company will contribute towards your claim. To get a better idea of how this works, let’s consider a real-life example.
Suppose your geyser suddenly bursts and needs to be replaced. If you don’t have home insurance, the cost of a new geyser and installation can be upwards of R7 500. This money will have to be paid upfront, which can mean dipping into your hard-earned savings or borrowing money from family or friends.
However, if you do have home insurance, all you have to do is contact your insurer and pay your excess. Your excess amount may be stipulated in your contract or your insurer may inform you of the amount when you file a claim. For example, if your geyser costs R7 500 and you have a R500 excess, your insurer will contribute R7000 towards the cost of replacing and installing a new geyser. You will only be liable for a payment of R500; you will not have to spend time shopping around for quotes or finding an experienced plumber.
Whilst paying an excess can seem unnecessary, it does save you a significant amount of time, effort, and money. Your excess amount is usually determined at the onset of your insurance policy and can fluctuate depending on your claim history and risk profile.
If you are concerned about the excess on your insurance policy, you can speak to your broker about how your excess is calculated. Additionally, it’s important to compare excess payments, terms and conditions when deciding on an insurer.
It's important to have an excess amount that is easily payable, as some insurers may refuse to pay out or deduct the excess amount from your final payout. This results in you losing out on benefiting from your insurance services whilst still paying premiums.
Life is full of nasty surprises and while we can’t prevent them, we can prepare for them. Having insurance for your assets is a smart way to create a financial cushion and protect yourself from major loss and debt in the future. Luckily, BudgetGist is here to keep you in the loop! We are South Africa’s information hub for all things related to finance and money.
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