Insurance Guide: Why Do Insurance Policies Have Excesses — and How to Choose the Right Level

An insurance excess is the amount you agree to pay towards any claim before your insurer pays the remainder. If you have a car insurance policy with a £300 excess and you make a claim for £2,000 of damage, you pay £300 and your insurer pays £1,700. If the damage costs less than your excess — say £200 — you bear the entire cost and there is no point claiming.

Most UK insurance policies have two types of excess. The compulsory excess is set by your insurer and you cannot change it. It is typically based on your risk profile — younger drivers, for example, face much higher compulsory excesses. The voluntary excess is an additional amount you choose to pay on top. Increasing it reduces your premium, but means you pay more out of pocket when you claim.

The total excess on any claim is compulsory plus voluntary. Understanding this distinction is essential — many policyholders only look at the voluntary figure and are surprised by the total when they claim. The FCA's insurance guide recommends always checking the total excess before buying a policy.

This is why having an adequate emergency fund is so important — you need to be able to cover your excess at short notice without going into debt.

Excesses exist for three fundamental economic reasons, and understanding them helps explain why they are unlikely to disappear any time soon.

Reducing moral hazard. Insurance creates what economists call moral hazard — the tendency for people to take less care when they know someone else will pay. If your car insurance covered every scratch with no cost to you, you might be less careful where you park. An excess ensures you have skin in the game. The Association of British Insurers notes that the UK general insurance market handled over 3.4 million motor claims in a recent year — without excesses dampening minor claims, the volume (and premiums) would be even higher.

Filtering out small claims. Processing a claim costs the insurer money regardless of the amount. For small claims — a £150 windscreen chip, a minor scratch — the administrative cost may exceed the payout. Excesses ensure that only claims above a meaningful threshold reach the insurer, keeping the system efficient and premiums lower for everyone.

Aligning premiums with risk appetite. By letting policyholders choose a voluntary excess, insurers create a self-selection mechanism. Careful drivers who rarely claim are happy to take a higher excess in return for lower premiums. Riskier drivers who expect to claim prefer a lower excess even if it costs more monthly. This price discrimination — entirely voluntary — helps the market function efficiently.

Excess structures vary significantly across different types of insurance, and understanding the norms for each can help you negotiate better.

Motor insurance typically has the widest range of excesses. Compulsory excesses for experienced drivers start from around £100, while drivers under 25 may face compulsory excesses of £300-£500 or more. Voluntary excesses can range from £0 to over £1,000. According to the ABI's motor insurance data, the average motor insurance premium in the UK has risen significantly, making the premium-excess trade-off more consequential than ever.

Home insurance — both buildings and contents — usually has lower excesses, typically £100-£500. However, watch out for special excesses: flood, subsidence, and escape-of-water claims often carry much higher excesses (£1,000-£2,500) regardless of your standard excess. If you are a homeowner, the excess on your buildings insurance should be weighed against the mortgage protection you need — see our mortgage rates guide for how lenders view insurance requirements.

Travel insurance excesses are often overlooked until a holiday goes wrong. Medical claim excesses can range from £50 to £200, while baggage and cancellation excesses are often similar. Given that medical treatment abroad can cost thousands, the excess is a minor consideration compared to the cover limit.

Pet insurance excesses typically range from £50 to £150 per condition, but some policies also apply a co-payment (percentage of the claim you pay) for older animals, effectively creating a second form of excess.

Choosing the right voluntary excess requires balancing three factors: your emergency savings, your claims history, and the premium saving on offer.

Step 1: Check your emergency fund. The golden rule is never set an excess higher than you can comfortably afford to pay at short notice. If you would struggle to find £500 tomorrow, setting a £500 voluntary excess is dangerous. Our emergency fund guide recommends keeping 3-6 months' essential expenses in an easily accessible account — and your insurance excess should come from this buffer, not from borrowed money.

Step 2: Calculate the premium saving. Get quotes at different excess levels and compare the actual savings. If raising your voluntary excess from £250 to £500 saves you £80/year, the £250 extra risk pays for itself in just over three years of not claiming. If it only saves £20/year, the trade-off is much weaker.

Step 3: Consider your claims history. If you have not claimed in 10 years, a higher excess makes statistical sense — you are unlikely to need it. If you claim regularly, keep the excess lower to reduce out-of-pocket costs.

Step 4: Factor in the specific policy. Some policies offer excess-free windscreen cover or protected no-claims bonuses that change the calculation. Read the policy schedule carefully — MoneyHelper's insurance guide provides useful checklists for what to look for.

Step 5: Review annually. Your circumstances change — income, savings, risk profile. The excess that made sense last year may not be optimal now. Review at renewal, just as you would review your savings accounts or [tax planning](/posts/tax-guide-uk-income-tax-202526-bands-personal-allowance-paye system managed by HMRC (gov.uk/tax-codes)-and-how-to-pay-less) annually.

Even financially savvy consumers can fall into excess-related traps. Here are the most common mistakes to watch for.

Setting an excess you cannot afford. This is the most dangerous mistake. In the rush to get a cheaper premium, it is tempting to set a £1,000 voluntary excess. But if you then have to claim and cannot pay the excess, you either cannot make the claim at all or you go into debt to fund it. The Financial Conduct Authority has flagged this as a consumer protection concern, particularly for younger and lower-income policyholders.

Forgetting about multiple excesses on one event. A single event can trigger multiple excesses. If a storm damages your roof (buildings claim) and ruins your carpets (contents claim), you may pay two separate excesses. Some insurers offer combined excess provisions — ask before buying.

Ignoring subsidence and flood excesses. These specialist excesses can be £1,000 or more and apply regardless of your standard voluntary excess. If you live in a flood-risk or subsidence-prone area, the effective excess on the claims you are most likely to make could be far higher than you expect.

Not comparing total cost of ownership. The cheapest premium is not always the best value. A policy with a £200 premium and £500 excess costs you up to £700 in the year you claim, while one with a £250 premium and £100 excess costs only £350. Over a period where you make one claim, the 'expensive' policy is actually cheaper.

Failing to check excess levels at renewal. Insurers sometimes increase compulsory excesses at renewal without making it obvious. Always check the renewal documents against last year's policy. If the excess has risen, it may be worth shopping around. Your savings from a lower excess could be kept in a high-interest savings account ready for any claims.

This article is for informational purposes only and does not constitute regulated financial advice. Insurance terms and conditions vary by provider. For personalised advice on your insurance needs, consult a qualified adviser.