Voluntary excess on insurance may be false economy

It may cut your premium but make sure you can afford it if disaster strikes

We're always looking for ways to bring down our insurance costs and for many people that means opting for a high voluntary excess but could this be a false economy?

An excess is the amount you pay towards a claim before the insurer will hand over any money. Most claims have a compulsory excess, partly to dissuade fraudulent claims, but insurers will usually offer you the option of adding a voluntary excess too. The argument for doing so is that in many cases (although crucially, not all) a higher excess means cheaper premiums. So, as long as you don't need to claim, you pay less for your insurance over the year.

For someone with a history of no claims this is an appealing option but only if you can comfortably afford the excess in the event of a claim. Research shows many customers are agreeing to excess levels that are well beyond their means.

A study by Axa Personal Lines has found that more customers are unable to repair damaged vehicles because they can't afford to cover the excess. In 2011, 29 per cent of its motorists didn't have enough savings to pay the excess if required, marking a 61 per cent rise on the year before.

Similarly, InsureMyExcess.com found that a third of recent claimants on motor, household, pet or health insurance struggled to pay the excess, but one in six still increased excess on motor insurance and one in eight on home insurance.

"It's no surprise that consumers are pushing up their excess to save money on their premiums, as pressure mounts on their household income," says Matt Tumbridge, a director of InsureMyExcess.com. "It's a time bomb waiting to explode for many households."

Most comparison websites also automatically default to a voluntary excess level so make sure you check as you could have a voluntary and a compulsory excess which could be a nasty shock when you claim. If the extra excess is so high as to put you off making a claim altogether, it makes paying for the insurance in the first place a complete waste of time.

As well as the risk of being left in the lurch if you do need to claim, it's also important to calculate whether the initial savings are worthwhile.

We asked Moneysupermarket to test out increasing the voluntary excess levels on various policies. After playing around with levels ranging from £0 to £500, the comparison site found that with home contents and buildings insurance you could save an average of £162 when comparing the cost of a £0 excess (£357) with a £100 excess (£195). However, when comparing a £100 excess with £250, the difference was marginal at a mere £20 and even worse, opting for a £300 excess actually pushed the premium back up to £180.

When it came to car insurance, the average saving from no voluntary excess to £100 was considerable at £183, but the discounts on higher excess levels were once again far less impressive. "It's quite clear that there is a saving if you increase your excess but it all depends on your attitude to risk. Unless you're a young driver where your premium is a lot higher, in most cases it makes sense to reduce your excess," says Peter Harrison from Moneysupermarket.

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