How Excesses Can Lower Premiums in Insurance
When you take out a health, life, car or home insurance policy there’s often a part of the agreement called an “excess.” For many people it’s a line in the policy that doesn’t get much thought. Understanding how your excess works can help you make a smarter decision about how much you pay for your insurance each month.
In simple terms, your excess is the amount of money you agree to pay out of your own pocket when you make a claim. Choosing a higher excess usually means you’ll pay less in regular premiums, while a lower excess will make your premiums higher. So how do you know which option is right for you?
Let’s take a closer look at how excesses work and how they can help you save money if used wisely.
What Is an Excess?
The excess is the portion of a claim that you agree to pay yourself. For example, if you have medical insurance with a $500 excess and you need surgery that costs $5,000, you’ll pay the first $500 and your insurer will cover the remaining $4,500.
Excesses are designed to prevent people from claiming for small, everyday costs. They also help keep the overall cost of insurance down because the insurer only has to pay when the bill is high enough to go over the excess amount.
You can usually choose from a few different excess levels when you set up your policy. Excess amounts often range from $250 to $1,000 or more. Some policies even have a “zero excess” option, but this comes with a higher price tag.
How Does a Higher Excess Lower Your Premiums?
Insurance companies use risk and cost to calculate how much to charge you. When you agree to pay a higher excess you’re reducing the amount the insurer might have to pay out in a claim. In return, they reward you with lower regular premiums.
Think of it this way: if your insurer knows you’ll cover the first $1,000 of any claim they’re taking on less financial risk. That’s less money they might have to pay and less cost for you in the form of monthly or annual payments.
It’s a trade-off. You save money every month, but you’ll pay more if you ever need to use your cover.
When a Higher Excess Makes Sense
Choosing a higher excess can be a smart option if you’re in good health or don’t often need to make claims. For example, with medical insurance, if you’re only using the policy for rare or emergency situations a higher excess might save you hundreds of dollars a year.
It also makes sense if you’ve got an emergency fund or some savings set aside. That way, if something does go wrong, you can afford to pay the excess when you need to make a claim. In the meantime, you’re keeping your insurance premiums more affordable.
If you’re buying cover mainly for peace of mind rather than for everyday use a higher excess can often give you the same protection, just at a lower cost.
When to Be Cautious About High Excesses
A higher excess might not be the right choice for everyone. If you don’t have savings to fall back on, paying a large excess could cause financial stress at the worst possible time. For example, if your health insurance has a $1,000 excess and you need sudden surgery coming up with that money quickly might be a problem.
Some people feel more comfortable knowing they’ll pay little or nothing if something unexpected happens. That’s completely valid, especially if you have a family to care for, or if you expect to use the insurance regularly.
The key is to strike a balance. Don’t just choose the cheapest option without thinking about how you’d handle a claim. Ask yourself: could I realistically afford the excess tomorrow if something went wrong?
Finding the Right Balance for Your Budget
Choosing the right excess is about understanding your own needs, risks, and financial comfort level. If you’re looking to lower your monthly costs and don’t mind taking on a little more responsibility during a claim, a higher excess can be a practical way to manage your insurance expenses.
It’s also a good idea to review your policy every year as situations change. Maybe you’ve built up more savings, or your health has improved — you might be in a better position to adjust your excess and reduce your premiums.
Insurance is there to protect you when life throws a curveball. By understanding how excesses work, you can make your cover more cost-effective without giving up the peace of mind it’s designed to provide.
Would you be able to cover your excess if something unexpected happened tomorrow? If so, you might be in a great position to save on your premiums today.