Better Budget: Insurance Excess

Insurance excess is the amount you pay out of pocket when making a claim. Most people accept their insurer's default excess without considering whether a different amount might be better for their situation. Adjusting your excess is one of the simplest ways to reduce your premiums, but it requires understanding the trade offs involved.

How Excess Affects Your Premium

Insurers offer excess amounts ranging from around $100 to $2,500 depending on the policy type. The relationship is straightforward: a higher excess means a lower premium because you are taking on more of the risk yourself.

For car insurance, increasing excess from $400 to $1,000 can reduce premiums by $100 to $250 per year depending on the vehicle value and your risk profile. A $10,000 value car insured with a $1,000 excess might cost $400 per year, while the same car with a $400 excess could cost $550 per year.

For home insurance, the savings can be larger. A $600,000 replacement value home insured with a $1,000 excess might cost $700 per year, while the same coverage with a $500 excess could cost $950 per year.

For contents insurance, similar principles apply. Choosing an $800 excess instead of $400 might halve your premium from $400 to $200 per year.

The Break Even Calculation

To determine whether a higher excess makes sense, calculate how long you would need to go without making a claim to recoup the additional out of pocket cost.

The formula is: (Difference in excess) divided by (Annual premium savings) = Years to break even.

For example, if raising your car insurance excess from $500 to $1,000 saves you $150 per year in premiums, the calculation is $500 divided by $150, which equals 3.3 years. If you go 3.3 years without making a claim, you come out ahead with the higher excess.

This calculation assumes you eventually make exactly one claim. In reality:

If you claim more frequently, a lower excess saves money because you pay less out of pocket per claim.

If you never claim, the highest possible excess saves the most in premiums over time.

Most people claim on car insurance every eight to ten years on average. For home and contents, claims are typically less frequent.

When Higher Excess Makes Sense

A higher excess is generally appropriate when:

You have emergency savings to cover the excess amount if needed. There is no point saving $150 per year if you would need to borrow money at high interest rates to cover a $1,000 excess.

You have a clean claims history and drive carefully. Past behaviour is a reasonable predictor of future claims.

The premium savings are substantial relative to the additional risk. Savings of $200 per year for a $500 increase in excess is a good deal. Savings of $30 per year is not worth the additional risk.

You own multiple vehicles or properties. The premium savings compound across policies while you would only pay the additional excess on one claim at a time.

When Lower Excess Makes Sense

A lower excess is preferable when:

You have limited savings and could not easily cover a high excess. Financial stress from an unexpected claim is worse than slightly higher premiums.

Your claims history suggests you are likely to claim. Some people have genuinely higher risk factors beyond their control.

The premium difference is minimal. If raising your excess from $500 to $1,000 saves only $50 per year, the additional risk is not worth taking.

Self Insuring Small Claims

An underappreciated strategy is simply not claiming for minor damage, regardless of your formal excess amount.

Insurance is designed for significant losses, not minor inconveniences. Claiming for damage that costs only slightly more than your excess can increase your premiums at renewal, even if the claim is paid.

Consider a rule of thumb: only claim when damage exceeds two to three times your excess amount. For a $500 excess, that means not claiming for damage under $1,000 to $1,500.

This approach preserves your no claims bonus, avoids premium increases, and keeps your insurance for when you genuinely need it.

Multi Policy Discounts

Before focusing solely on excess, check whether multi policy discounts might offer larger savings.

Most insurers offer 10 to 25% discounts when you bundle car, home, and contents insurance with the same provider. On combined premiums of $2,000 per year, that could be $200 to $500 in savings, potentially more than you would save by adjusting excess amounts.

However, always compare the bundled price against separate policies from different insurers. Sometimes a competitor's standalone price beats the bundled discount.

Other Premium Reduction Options

Beyond excess and bundling, several other factors affect premiums:

Security features like deadlocks, window locks, and alarm systems can reduce home and contents premiums.

Vehicle security including immobilisers and parking in a garage affects car insurance costs.

Higher voluntary excess specifically for windscreen claims can reduce comprehensive car insurance premiums while keeping the main excess lower.

Paying annually rather than monthly avoids the payment plan fees many insurers charge.

Reviewing Your Policies

Insurance excess is worth reviewing whenever your circumstances change. If your savings have grown, you may be comfortable with a higher excess than when you first took out the policy.

Similarly, if your financial position has tightened, lowering your excess provides peace of mind that a claim will not create additional stress.

Most insurers allow excess changes at renewal without penalty. Some allow mid term changes, though this may trigger a premium adjustment.

Finding Your Balance

The right excess depends on your personal financial situation, risk tolerance, and claims history. There is no universally correct answer.

For most people with reasonable emergency savings, increasing excess to around $750 to $1,000 for car insurance and $750 to $1,500 for home insurance provides good premium savings without excessive risk. This approach typically saves $150 to $400 per year across policies.

The savings are modest but consistent. Combined with other budget optimisation strategies, they contribute to a household that has more capacity for mortgage repayments or other financial goals.