An Overview of Deductibles in Car Insurance

05 Aug 2021

It goes without saying that if you have a car, you need adequate insurance to protect you against financial losses in the event of an accident. Unfortunately, adequate protection means a higher insurance premium. However, you can save money on the insurance by going for a higher deductible instead. This blog explains how you can use the deductibles to your advantage and if the car insurance is deductible on taxes?

Premium and deductibles are two components that determine the cost of your car insurance. While a premium is a regular cost you pay to an insurance company for providing the policy coverages, a deductible is an amount you owe if you make a claim. The main difference between premium and deductible is that premium is a regular cost you need to pay for your insurance whether you make a claim or not; a deductible is payable only if a claim is made.

To evaluate the importance of a deductible in your insurance policy, let us understand, with an example, what an insurance deductible is all about.

car insurance deductible is the amount of money you agree to pay upfront to the insurer if you claim insurance. For instance, if you set your deductible at Rs. 40,000, and after an accident the company agrees to pay Rs. 80,000 in damage, you will get only Rs. 40,000.

Types of deductibles

There are two types of car insurance deductibles – compulsory and voluntary.

Compulsory deductible in car insurance

Your insurer alone decides the compulsory deductible amount based on the Insurance Regulatory and Development Authority’s guidelines, and you have no choice in it.

The amount varies depending on the capacity of your car engine, type of policy you have, your age and the kind of vehicle you drive. For example, you could be straightway charged a higher deductible if your car is older.

At present, the compulsory deductible amount is fixed at Rs. 1,000 for cars with engine capacity up to 1,500 cc and Rs. 2,000 for engines above 1,500 cc.

The compulsory car deductible does not affect the premium you pay, and it does not apply to third-party insurance. In the case of third-party insurance, your insurer pays the other party, and you pay nothing for the claim, although you may have to pay a higher premium at the time of renewal of the policy because of the accident.

What is voluntary deductible in car insurance?

You have total freedom when it comes to choosing the voluntary deductible in car insurance. Also, you can increase or decrease the voluntary deductible amount at any point during the policy term.

Even if you opt for a voluntary deductible in car insurance, you have to pay the compulsory deductible amount to make a claim.

So, if your compulsory deductible is Rs. 2,000 and you opted for a voluntary deductible of Rs. 30,000, you will have to pay the insurer Rs. 32,000 towards the cost of your claim.

Rationale behind deductibles

Insurance companies and insurance regulators see a dual purpose in a car deductible. First, it reduces the number of claims by discouraging people from making frivolous or minor claims. Secondly, the prospect of paying from one’s pocket after an accident encourages them to be careful while driving and ensure the safety of their car even when it is not on the road.

Is paying a voluntary deductible avoidable?

No, if you have agreed to it at the time of buying your car insurance. Whenever you file a claim, you have to pay the deductible. There may be no deductible for specific insurance add-ons such as roadside assistance.

How does a deductible affect the cost of insurance?

Car owners usually opt for a deductible based on their capacity to pay and risk assessment. The deductible you agree to pay the insurer when buying car insurance directly affects your premium for the entire coverage period. Generally, the higher your insurance plan’s deductible, the lower your premium will be. The insurance company offers lower premiums simply because, with a higher deductible, the insured takes greater responsibility for the expenses of a claim. Therefore, choosing a higher deductible can be a perfect option if you drive carefully and ensure minimal claims.

At the same time, you should remember that the deductible on a car insurance policy will apply each time you file a claim.

Is car insurance deductible on taxes?

Car insurance is tax-deductible for a particular category of taxpayers and under specific circumstance. For example, you can fully deduct your car insurance costs on your tax return if you are self-employed and use the vehicle solely for business purposes. However, if your car is being used strictly for personal purposes, you cannot claim any tax exemption. Business establishments having vehicles as business assets may claim a tax deduction for insurance charges paid by them. They will, however, have to prove that the asset costs and insurance expenses fall strictly in the business purposes category.

Suppose your car is used for business as well as personal purposes. In that case, you can claim deduction on insurance paid proportionately, i.e., only for the part it was used for business travel. For example, if a car was in use for 500 kilometers in a given month and exclusively used for business purposes for 300 kilometers, you can claim a deduction for 300 kilometers.

Such calculations are a bit complicated, and you may need expert advice to move forward.

Your car deserves the best possible insurance, and Liberty General Insurance offers you a wide range of options to choose from.

A Tip for Car Owners

Never let your car insurance coverage lapse without a new policy in hand. Being without a car policy even for a short time is not only risky from a legal and financial point of view; it may cause your premiums to soar.

Disclaimer: For more details on risk factors, terms & conditions please read sales brochure carefully before concluding a sale. *The discount amount will vary subject to vehicle specification and place of registration