An insurance excess is the amount you agree to pay towards a claim before your insurer covers the rest. It's a critical factor in your insurance policy as it directly impacts the cost of your premiums and the potential out-of-pocket expense during a claim. For investors and landlords, understanding excess is essential for financial planning and risk management.
In the simplest terms, the excess is your contribution to any claim you make on your insurance. For example, if you have a $1,000 excess and you make a claim for $10,000 worth of damage, your insurer will pay $9,000, and you will cover the remaining $1,000. The excess can be a fixed amount or a percentage of the claim, depending on your policy.
One common misconception is that a higher excess will always lead to lower premiums. While increasing your excess can reduce your premium, it also means higher out-of-pocket costs if you need to make a claim. Balancing the premium savings with potential claim costs is key.
Take a practical example: Consider a landlord with a rental property in Melbourne valued at $850,000. Suppose the landlord's insurance policy includes a standard excess of $750. If a storm causes damage valued at $5,000, the landlord would pay the $750 excess, and the insurer would cover the remaining $4,250. At a 37% marginal tax rate, the landlord could potentially offset this cost against rental income, reducing their tax liability by $277.50.
In our experience reviewing thousands of properties across Australia, we find that many landlords underestimate the impact of excess on their cash flow. They often opt for higher excesses to save on premiums without fully considering the financial strain of a claim. Another common oversight is not reviewing excess levels regularly, especially after renovations or significant changes to the property.
The answer can differ depending on your situation. For example, an investor with multiple properties might negotiate a lower excess across all policies to manage cash flow better. Conversely, a first-time landlord might prefer a higher excess to reduce premiums. Additionally, excess rules can vary for different types of insurance, such as building versus contents insurance.
For aspects like setting the right excess level, considering tax implications, and understanding policy nuances, collaborating with a Chartered Quantity Surveyor and an accountant is invaluable. They can help tailor your insurance strategy to align with your broader investment goals.