An excess is an amount that you pay yourself when you make an insurance claim. For example, if your car is insured against accident damage and you have a minor accident that requires the replacement of a door panel to the value of R20 000, you may have to pay the first R2 500, and your insurer will pay the rest.
There are different types of excess, and your excess is typically set in advance when you take out your policy, so don’t forget to check on this if you’re not sure what your excess amounts are. Nearly all insurance policies have an excess amount.
The main reason for having an excess on an insurance policy is to prevent people from making lots of small claims, which would make insurance more expensive for everyone.
But surely having insurance is for exactly that reason – so that you can claim when something happens and don’t have to pay out of your own pocket?
This is partly true. Remember that in order to make insurance affordable for all of us, a balance has to be struck. The real benefit of an insurance policy is so that it can pay for damage or loss that you can’t afford to pay for yourself. That’s the important part, which is worth repeating: insurance is there for when you can’t pay yourself.
So, from the get-go, insurance was not designed to be a fund that you can dip into whenever you need to pay for something, even if it is listed in your policy. This may sound like a contradiction, but bear with us.
That’s where the excess comes in – by making you pay a certain portion of a claim upfront, an excess protects the larger fund. If you lose a side mirror in a parking lot and your excess is more than or most of the cost of replacing the mirror, it makes no sense for you to claim for the mirror, because you’ll pay for it anyway. And remember, this is an affordable expense for you, so you technically don’t absolutely need the insurance cover.
So having an excess is actually a protection to ensure that there will be money available to you when you need to claim for higher amounts.
Of course, we could do away with an excess completely, but that would mean you’d end up paying more for your insurance. Because the other way of ensuring that there is always enough money for large, expensive claims is to charge everyone a higher premium.
So an excess also helps to keep your monthly premiums down. By agreeing to fund a certain amount of your claims, you effectively get a discount on your insurance premiums.
At the end of the day, though, many insurance companies give you a choice of taking an excess or paying higher premiums, depending on what policies they offer. So there is room for you to decide which you would prefer. The important thing is to understand why you pay the excess, so that you can make an informed financial decision.