What Is a Deductible in Car Insurance? Complete Guide for First-Time Buyers

What are Deductibles in Car Insurance?

In layman’s terms, a deductible in car insurance is an amount that needs to be paid by the policyholder during claims before the coverage kicks in, and the insurer covers the remaining. The primary objective of deductibles in motor insurance is to discourage policyholders from making minimal value claims and lower claim frequency.

For example, after a minor accident, if the final claim amount is less than or almost equal to the total car insurance deductible, policyholders may prefer settling such claims out of their own pocket. Also, higher deductibles promote safer driving habits among drivers, reducing risky manoeuvres and the incidence of accidents.

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Types of Deductibles in Car Insurance

In the context of car insurance in India, deductibles in motor insurance fall under these two categories, namely:

Compulsory deductibles

A compulsory deductible in car insurance is a specified amount that the policyholder has to pay in the event of a claim. This is a mandatory out-of-pocket expense that you have to bear, regardless of the total cost of repairs or replacements. The IRDAI has fixed the minimum value of the compulsory deductible in car insurance, and it is as follows:

Engine Capacity of Private Car

• Up to 1500 cc: Compulsory deductible of ₹1,000
• Exceeding 1500 cc: Compulsory deductible of ₹2,000

Note: Some insurers may charge higher compulsory deductibles in car insurance if the vehicle is perceived as a higher risk due to its age or claim frequency.

Voluntary deductibles

On the other hand, a voluntary deductible in car insurance is not mandatory. It is optional and left to the policyholder’s discretion when purchasing the car insurance policy. If chosen, it is to be paid alongside the compulsory deductible by the policyholder at the time of every car insurance claim. In exchange for this increased financial responsibility during claims, policyholders can ensure upfront savings on car insurance premiums.

Insurers typically offer voluntary deductibles and associated discounts as per the following bracket:

Voluntary Deductible & Discount on Own Damage Premium

• Voluntary deductible ₹2,500 → 20% discount, savings up to ₹750
• Voluntary deductible ₹5,000 → 25% discount, savings up to ₹1,500
• Voluntary deductible ₹7,500 → 30% discount, savings up to ₹2,000
• Voluntary deductible ₹15,000 → 35% discount, savings up to ₹2,500

How Do Deductibles Work in Car Insurance?

When you file a car insurance claim with your insurer, and it gets approved, you will need to pay the necessary deductibles first before the coverage takes care of the rest. Let us take a look at a real-life example for better understanding:

Suppose Mrs Kapoor has bought a comprehensive car insurance policy with a zero-depreciation add-on for her brand new vehicle. She has also opted for a voluntary deductible of ₹2,500. Now, let’s assume she has met with a car accident, so she filed a car insurance claim, and the repair estimate for damages is quoted at ₹25,000.

In this situation, Mrs Kapoor has to pay the total deductibles first before the insurance company takes care of the remaining bill. Let’s assume the compulsory deductible is ₹1,000, so she has to pay ₹3,500 in total deductibles (₹1,000 + ₹2,500), while the insurer covers the rest, i.e., ₹21,500 (₹25,000 - ₹3500).

On the topic of car insurance deductible, note that while paying the compulsory deductible is mandatory, you only need to pay the voluntary deductible if you have opted for it. If you haven’t selected a voluntary deductible, then you only need to cover the compulsory deductible during claims.

Note: Besides deductibles, necessary depreciations also apply to car insurance claims. For the purpose of helping readers understand deductibles and keep the explanation simple, the example of a comprehensive policy with zero depreciation cover has been used.

Compulsory vs Voluntary Deductibles: Key Differences

The following chart highlights a clear distinction between voluntary and compulsory deductibles in car insurance:

Benefits of Deductibles in Car Insurance

While a compulsory deductible is applicable to every Own Damage (OD) claim and you can’t opt out of it, you have the choice of including a voluntary deductible in the policy. If you are considering it, take a look at the several benefits of voluntary deductibles:

Lower upfront costs:

When you choose voluntary deductibles, you get a discount on the OD premium of car insurance. So, basically, by accepting higher financial responsibility during claims, you can reduce upfront costs incurred on car insurance.

Preservation of NCB:

During claims, you have to pay the total deductibles, which include both voluntary and compulsory deductibles. This can amount to a significant out-of-pocket expense. Knowing that, you are less likely to file for smaller claims, which increases your chances of protecting your NCB benefits.

Flexibility:

Choosing a voluntary deductible is optional, and you get to pick from a wide price bracket, depending on your budget, preferred discount and risk appetite.

Passive benefits:

By opting for voluntary deductibles, you accept a higher financial responsibility during claims. Knowing you have to bear such high costs out of your own pocket, you will be more motivated to adopt safer driving habits to reduce the chances of collisions.

Conclusion

Understanding deductibles in car insurance is the key to customising your policy and ensuring proper coverage. While compulsory deductibles are fixed, choosing the correct voluntary deductible lets you significantly lower your annual insurance premium. Evaluate your coverage needs, financial standing and risk tolerance to strike the perfect balance between affordability of claims and upfront savings.

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