My car insurance renewal is due this week and admittedly I’ve not previously thought much about the optimal excess amount. However, after paying the excess last year when my car was stolen I opened a fresh spreadsheet and called my insurer.
As you probably are aware, the excess is the amount of any claim that you will have to pay from your own pocket. The insurer will cover the rest up to the total insured amount on your policy. The insurer offers you a lower premium if you are prepared to cover more of the claim cost.
Here’s the results for my policy:
| Excess | Extra Premium p.a. | Breakeven years |
|---|---|---|
| $1,500 | – $54 | 13 |
| $1,000 | – $27 | 7 |
| $800 | Nil (default) | |
| $550 | $54 | 5 |
| $450 | $108 | 3 |
| $300 | $297 | 2 |
The optimal selection depends on how frequently you expect to claim on your insurance policy.
- If you expect to claim less frequently than the breakeven years then you are better off with the higher excess and saving the premium.
- If you expect to claim more frequently than the breakeven years then you are better off with the lower excess and paying a higher premium
The principle
The premium you pay is a certain expense.
However, it is uncertain that you will ever need to pay the excess. In fact, we hope that is unlikely that we need to make a claim.
I believe that it is better to reduce my certain expenses rather than pay more now for the possibility of saving money later. Therefore, I prefer to increase my insurance excess and lower my premium.
Build your emergency savings
With the premium you save, I recommend you regularly and automatically deposit it into a separate ’emergency savings’ account. In this way, you can be confident you have money available for the excess, as I was last year when my car was stolen.
Based on the premiums quoted by my insurer it seems the default excess of $800 is about the sweet spot for my policy.