Budgeting hacks to manage your insurance excess

Choosing the right amount of excess requires a delicate balancing act between affordability and coverage. File photo.

Choosing the right amount of excess requires a delicate balancing act between affordability and coverage. File photo.

Published May 15, 2024


By Siyakha Masiye

One of the most important points that you will negotiate with your insurer when purchasing insurance cover is the excess amount. An excess amount on an insurance policy is the upfront contribution the client agrees to pay out of pocket before the insurer steps in to cover the rest of the costs in the event of a claim. Choosing the right amount of excess requires a delicate balancing act between affordability and coverage.

While it’s impossible to predict when and where the unexpected will occur, tailoring your monthly budget to your unique insurance needs can go a long way in simplifying the claims process.

The major benefit of paying an excess amount is that by effectively sharing some of the risk involved with owning an asset, you can make your monthly insurance premium more affordable. So, by understanding and choosing the right excess amount, you can enjoy peace of mind knowing that you're as prepared as possible for the risks that lie ahead, without breaking the bank.

Make it manageable

Sharing practical tips on how to budget for insurance and excesses, in particular, adding an insurance premium as a line item into your monthly budget to see how other expenses can be structured to accommodate it. Once this has been done, you may have a clearer idea of what is affordable each month and how much flexibility you have around the monthly cost.

Most insurers apply a standard excess amount to any policy. In addition, the insurer may offer the option of paying a voluntary excess amount that is suited to the client’s financial needs.

Some insurers allow clients to opt for an excess waiver, or a clause that allows them to pay no standard excess in exchange for a slightly higher monthly premium. In these cases, the insured can avoid paying the standard excess amount altogether if they make a claim, which can provide peace of mind in the event of an unexpected expense.

The challenge for the insured is weighing up the cost of their insurance premium (and their chosen excess amount) as part of their broader monthly and annual budget. Opting for a higher excess generally results in reduced premium costs and vice versa, and the final decision should be made within the context of your long-term financial plan.

Start an emergency excess fund

Once an excess amount has been agreed upon, it’s vital to allocate funds towards covering this amount in the event of a claim needing to be made. It is a well agreed principle in the financial world that building an emergency fund can take care of unplanned expenses and is a prudent, forward-thinking decision.

Knowing you have a pool of money that is earmarked for the possibility of an insurance claim will provide for another level of financial stability and the assurance that paying an excess will not derail your financial plan and the goals you’ve set out to achieve.

An effective way of saving for an emergency fund is to start with small but consistent contributions. Your initial contributions towards the fund can remain small and manageable at the beginning of your savings journey and increase as you become more disciplined.

A fail-safe way of sticking to your savings commitment is to set up an automatic transfer into a dedicated savings account at the beginning of each month and to view it as you would any other debit order. The key is consistency – like every sound financial principle, saving on a consistent basis takes practice to perfect.

Recoup and review

What many first-time clients don’t realise about insurance is that it can be adjusted. In fact, one of the most important things you need to do when you’ve undergone a major lifestyle shift, acquired a new asset or made material changes to your financial plan, is to review your insurance policies. The same thinking should be applied to excess.

Some insurers accommodate requests to change an excess amount during predetermined periods or at renewal phase, while others may have certain restrictions. Before changing your excess, it’s recommended that you speak to your insurer or broker to discuss your change of circumstance and the potential financial impact of changing your excess, so you can make the most informed decision.

At the very least, insurance policies should be reviewed on an annual basis, not only to avoid pitfalls like underinsurance, but also to make sure that your policy remains aligned with your bigger financial picture.

* Masiye is a spokesperson at MiWay Insurance.