Unlocking the Mystery of Insurance Excess & Its Impact on Your Premiums

When shopping around for insurance policies, you may have come across the term "excess." It's an important factor to consider when selecting an insurance policy, especially if you're looking to save money on your premiums. So, what is excess in insurance and why is it so important in South Africa? In simple terms, excess is the amount of money that you agree to pay out of your own pocket before your insurance policy kicks in.

This means that if you make a claim on your policy and the repairs or damages cost less than your excess, then you'll have to pay for it yourself. If the costs exceed your excess amount, then your insurer will cover the rest.

The importance of excess in South African insurance policies

Excess plays a crucial role in insurance policies in South Africa. Without an excess clause, insurers would be exposed to too much risk from fraudulent claims and small claims that customers could easily afford without making a claim. By requiring customers to pay some portion of each claim out of their own pocket first, insurers are able to limit their exposure to these types of risks.

For example, imagine if an insurance company had no excess clause and someone made a claim for R500 worth of damage to their car's bumper. The insurer would have to cover the full amount even though it may not have been worth making a claim for such a minor issue.

On the other hand, if there is an excess amount of R1 000 and someone makes the same R500 claim, they would only receive R500 from their insurer as they'd be responsible for paying off the first R1 000 themselves. In this way, having an excess helps cut down on frivolous or small claims made by customers who might otherwise try to use their policies as much as possible without paying any costs out-of-pocket.

What is excess in insurance?

Excess is a term commonly used in the insurance industry in South Africa. It refers to the amount of money that you, as a policyholder, will need to pay out of your own pocket towards a claim before your insurer covers the rest. For example, if you make a claim for R10,000 and your excess is R1,000, you will need to pay R1,000 towards the claim and your insurer will cover the remaining R9,000.

How does insurance excess work?

Excess is essentially a form of self-insurance. The idea behind it is that by paying a portion of the claim yourself through an excess payment, insurers can reduce the number of smaller claims they receive. This helps keep premiums lower for all policyholders by reducing overheads such as administrative costs.

The difference between voluntary and compulsory excess

There are two types of excess: voluntary and compulsory. Compulsory excess is set by your insurer and cannot be changed or waived. It's often used to help insurers reduce risk on high-risk policies such as home or car insurance.

Voluntary excess is an optional amount that you can choose to add to your policy above and beyond any compulsory excess already set by your insurer. This can help reduce your premium but also means that you'll need to pay more out-of-pocket if you make a claim later on down the line.

Overall, understanding what excess means when it comes to insurance policies in South Africa is crucial when selecting an appropriate level of coverage for yourself. Now that we've covered what exactly this term refers to let's look at why insurers have incorporated this aspect into their policies.

Why do insurers have excess?

Insurance companies use excess as a way to share the risk with policyholders. When customers agree to pay a portion of the cost of a claim, it reduces the financial liability for insurers. The purpose of excess is to ensure that customers do not make frivolous claims for minor issues or repairs, and that they only make claims when there is significant damage or loss.

The purpose of excess for insurers

The main reason why insurance companies have excess is to encourage responsible behavior among policyholders. If there were no excess, people would be more likely to file small claims that are not worth it. By sharing the risk with policyholders, insurance companies can keep premiums low because they don't have to cover every small claim.

How does excess help reduce fraudulent claims?

Insurance fraud is a major problem in many countries, including South Africa. Fraudulent claims can cost insurers billions of Rands each year and ultimately drive up premiums for everyone else.

One way that insurers are able to reduce fraudulent claims is by having an excess. If someone wants to commit fraud by making a false claim on their insurance policy, they will likely be deterred by the fact that they will have to pay some money out of their own pocket as well.

This makes it less attractive for fraudsters who might otherwise see insurance as an easy way to make money. By reducing fraudulent claims, insurers are able to keep premiums lower and more affordable for honest policyholders who really need coverage in case something goes wrong.

How does excess affect your insurance premium?

Excess is a crucial factor that affects your insurance premium in South Africa. Insurance premiums are the payments you make to an insurer for coverage, and the amount of excess you choose will determine how much you pay.

The higher the amount of excess, the lower your monthly premium will be. Similarly, choosing a lower excess will result in a higher monthly premium.

To illustrate this point, let's consider car insurance. If you choose a R5000 excess and have an accident that costs R10,000 to repair, then you will need to pay R5000 out of pocket before your insurer covers the remaining R5000. If you choose a higher excess like R7500 or R10,000 instead, then your monthly premiums would be lower than if you had chosen a lower or more standard figure like R2500 or R1500.

Choosing a higher (or lower) excess impacts your premium

While it may seem tempting to always go with the highest possible excess in order to save money on insurance in South Africa, there are some potential drawbacks as well. For one thing, if an accident happens and you don't have enough cash on hand to cover that high deductible upfront it can present problems with getting repairs done quickly.

On the other hand, if you always choose very low deductibles or no deductibles at all when buying insurance policies then this could mean paying significantly more each month for coverage than someone who opts for higher limits - even if they have similar driving records or risk profiles. Ultimately it's important to weigh up all these factors and decide which level of excess is right for you based on your financial situation and personal risk tolerance.

Excess waivers: When are they useful?

When selecting an insurance policy, you may be offered an excess waiver as an optional add-on. An excess waiver is essentially a type of insurance that covers the cost of your excess if you have to make a claim.

This can be useful in situations where you may not have the funds available to pay your excess upfront or if you want to avoid dipping into your savings. The usefulness of an excess waiver depends on individual circumstances and preferences.

If you are someone who wants peace of mind and wants to avoid any unexpected expenses, then an excess waiver might be right for you. Additionally, some people might prefer to pay a higher premium and lower their exposure to risk by purchasing an excess waiver.

The pros and cons of excess waivers

As with any product, there are pros and cons to purchasing an excess waiver. The main advantage is that it can give you peace of mind knowing that your out-of-pocket expenses will be covered in the event of a claim. This can help reduce stress and anxiety around making a claim. On the other hand, one downside is that purchasing an excess waiver can increase the overall cost of your insurance policy.

This means that while it may reduce your exposure to risk, it could also end up being more expensive in the long run. Another important factor to consider is whether or not the insurer will cover all types of claims or only specific ones.

Some insurers may only offer coverage for certain types of claims or may have exclusions based on the nature or cause of the claim. Ultimately, when considering whether or not to purchase an excess waiver, it's important to weigh up both sides carefully and decide what makes sense for your individual situation.

Excess in different types of insurance policies

Cars: The high-risk policy

Car insurance policies commonly have excesses to protect the insurer against claims for damage or theft. The excess is usually set at a fixed amount and can vary based on the policy, driver's age, driving history and many other factors.

In South Africa, car insurance excess can range from R1,000 to R5,000 depending on the insurer. If a claim is made under the policy and an excess applies, the driver will need to pay this amount upfront before the insurer will pay out on any damages that exceed this cost.

Homes: Protecting your valuable property

Home insurance policies work similarly to car insurance policies in that they offer protection against damage caused by natural disasters or theft. However, home insurance policies usually have much higher excesses than car insurance policies because homes are typically worth more than cars.

In addition to the standard excess that applies to most claims in home insurance, there may also be additional excesses for certain events such as flood or fire damage. Homeowners should carefully consider their needs when selecting an appropriate level of home insurance cover.

Health: Choosing your plan carefully

In South Africa, health care costs are high and can often be unexpected. Health Insurance plans typically come with an annual deductible which functions similarly as an excess in other types of policies.

However unlike traditional insurances these do not carry over into upcoming years. The higher your deductible is on your health plan then lower you'll see monthly premium payments but then a sudden unexpected medical bill could wipe out any savings that you've accumulated by going with a high-deductible plan.

Travel: Paying extra for peace of mind

Travel Insurance offers peace of mind while traveling outside South Africa and comes packed with a number of different insurance policies. It is also available to cover everything from lost baggage, trip cancellations and repatriation after an accident or illness.

When it comes to the excess, travelers should make sure that they read the fine print of their policy carefully and understand all the terms and conditions of what is covered and what not. Each type of insurance policy comes with its own unique excess structure so it's important to choose the right level of coverage for your needs.

Conclusion

Now that we have covered what insurance excess is and how it works in South Africa, it's important to summarize the key points that we've discussed. Excess is simply the amount of money you agree to pay upfront towards a claim before your insurer pays out any benefits. It's an essential component of most insurance policies and helps to keep premiums affordable for everyone.

It's essential for readers to carefully consider their own needs when selecting an appropriate level of insurance excess. A higher excess will result in lower premiums but also means you'll pay more out-of-pocket if you ever need to make a claim.

Conversely, a lower excess will increase your premiums but reduce the amount you have to pay initially after lodging a claim. Ultimately, choosing the right level of excess comes down to balancing your risk tolerance against your budget constraints.

If you're confident that you won't need to make many claims, then a higher excess may be a good option for you. However, if you're worried about unexpected expenses or have particular items or risks that are important to cover, then it may be worth considering a lower excess.

Having an understanding of how insurance excess works can help South Africans make informed decisions when selecting an appropriate level for their policy. By carefully weighing up the costs and benefits of different options, readers can ensure they have adequate protection without breaking the bank.