What is the Difference Between Excess and Deductible?
🆚 Go to Comparative Table 🆚The main difference between an excess and a deductible lies in how they affect the payout of an insurance claim and the policy limit. Here are the key differences:
- Excess: An excess operates similarly to a deductible, but the policy limit is exclusive of the excess. This means that the insured is responsible for the excess amount before the insurance company pays the remaining amount of the claim. Unlike a deductible, an excess does not erode the aggregate policy limit.
- Deductible: A deductible is a fixed amount that the insured must pay before the insurance company will pay the remaining amount of the claim. The policy limit is reduced by the deductible amount.
In practice, a deductible and an excess may have the same result, but this is not necessarily the case. For example, if an insured has a policy limit of $20 million and an excess of $1 million, and the insured incurs a loss of $9 million, the insured will pay $1 million towards the claim, and the insurer will pay the remaining $8 million. In this scenario, an excess and deductible have the same effect.
However, if the insured incurs a loss of $25 million, being an amount in excess of the policy limit, the insurer will pay $20 million, and the insured will pay the remaining $5 million. The "excess" is not "deducted" from the total amount paid out by the insurer, but in effect, the insured will pay that amount as they remain liable for the amount of the loss that exceeds the policy limit.
In summary, an excess is an additional amount the insured must pay before the insurance company pays the remaining amount of the claim, while a deductible reduces the maximum payout of the policy. Both excess and deductible are methods for the insured to share the costs of a claim with the insurance company, but they function differently in terms of their impact on the policy limit and payout.
Comparative Table: Excess vs Deductible
The difference between excess and deductible can be understood through their definitions and how they work in insurance policies:
| Deductible | Excess |
|---|---|
| A fixed contribution that the policyholder must make towards their treatment costs each calendar year | Due as soon as the deductible selected is used up for a calendar year, the policyholder pays a certain percentage of their treatment costs up to a maximum limit |
| The deductible reduces the maximum payout | The excess does not reduce the overall policy limit |
| Deductible is usually written for relatively small amounts of the policyholder's retention of liability | Excess is often a certain percentage of the sum insured and not a fixed amount |
In summary, a deductible is a fixed amount that the policyholder must pay towards their treatment costs each calendar year, and it reduces the maximum payout. On the other hand, an excess is a percentage of the treatment costs that the policyholder must pay after the deductible has been used up for a calendar year. The excess does not reduce the overall policy limit.
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