Key Takeaway

Your insurance excess (the amount you pay towards a claim before the insurer covers the rest) and your premium (what you pay for the policy) move in opposite directions. Choose a higher excess and your premium drops; choose a lower excess and your premium rises. The right balance depends on how much you can afford to pay out-of-pocket if you need to claim and how often you expect to make a claim.

What Is an Excess and Why Does It Matter?

Your excess is the portion of a claim you agree to pay yourself before your insurer steps in. Most Australian car, home, and contents policies let you choose a voluntary excess on top of any compulsory excess already built into the policy. According to ASIC MoneySmart, the excess structure is one of the most important cost levers you control when you take out a policy.

Your total excess might include a compulsory base amount (set by the insurer), a voluntary amount (your choice), an age-based excess (common on car policies for drivers under 25), and sometimes an inexperienced-driver excess. When you claim, you pay the total of all applicable excess categories.

1. Higher Excess Equals Lower Premium

When you elect a higher voluntary excess, insurers reward you with a lower annual or monthly premium. The maths is straightforward: you are taking on more of the financial risk yourself, so the insurer charges you less for the policy.

For example, raising your car insurance excess from A$500 to A$1,000 might save you A$100 to A$200 per year on your premium (the exact saving varies by insurer, your location, and your claims history). On a home insurance policy, moving from a A$500 excess to A$1,500 could reduce your annual premium by A$150 or more.

This trade-off reflects the core risk-sharing principle covered in foundational texts such as Principles of Finance: the party bearing more immediate cost (you, through the higher excess) receives compensation in the form of a lower ongoing cost (the premium).

2. Lower Excess Equals Higher Premium

Conversely, if you choose a low or zero voluntary excess, your premium will be higher. You are asking the insurer to cover more of each claim from the first dollar, which increases their expected payout and therefore your cost.

A zero-excess option on a comprehensive car policy, for instance, can add A$200 to A$400 per year compared to a policy with a A$750 excess. For drivers who claim infrequently and have emergency savings, this trade-off rarely makes financial sense: you pay the extra premium year after year, even in years when you make no claim at all.

3. The Claim Trade-Off: What You Pay When Something Goes Wrong

Premiums are certain; claims are not. When you do lodge a claim, the excess is the immediate cash you must pay. If you chose a A$1,500 excess to save A$150 per year on your premium and then suffer A$3,000 worth of storm damage to your home, you will pay the first A$1,500 and the insurer covers the remaining A$1,500.

The Insurance Council of Australia notes that many Australians underestimate the impact of a high excess when a claim hits. If you cannot afford to pay the excess out of pocket, the claim becomes difficult or impossible to settle, even though you hold valid cover.

4. Small Claims Can Cost More Than the Excess

When your excess is high and the damage is minor, claiming may not be worthwhile. If a car windscreen replacement costs A$600 and your total excess is A$750, you will pay the entire cost yourself (the insurer pays nothing). In this scenario, the claim also goes on your record, which can reduce your no-claim discount and raise future premiums.

This is the hidden cost of choosing too high an excess without considering the typical claim values in your situation. Review your Product Disclosure Statement (PDS) to understand when claiming actually benefits you.

5. Finding Your Sweet Spot: Match Excess to Your Financial Buffer

The right excess depends on how much you can comfortably afford to pay in an emergency. If you have A$2,000 in accessible savings and rarely claim, a A$1,000 to A$1,500 excess on car or home cover can deliver meaningful premium savings without leaving you exposed.

Read also: How Excess Works on Australian Home and Vehicle Insurance

If your emergency fund is tighter, or if you drive in high-risk areas or own an older property where small claims are more frequent, a lower excess (A$500 to A$750) keeps the out-of-pocket cost manageable, even though you pay more in premiums. Run the maths: multiply the annual premium saving by the number of years you expect to hold the policy claim-free, and compare that total to the extra excess you would pay if a claim occurs.

6. Age-Based and Compulsory Excesses Are Not Negotiable

Remember that your voluntary excess stacks on top of compulsory and age-based excesses. If your policy has a A$600 compulsory excess, a A$500 age excess (because you are 23), and you added a A$500 voluntary excess, your total claim cost is A$1,600 before the insurer pays anything.

Young drivers and those with recent claims often face higher compulsory excesses; adding a large voluntary excess on top can push the total well beyond what is affordable. Check the PDS and the Target Market Determination (TMD) to see all applicable excess categories before you finalise your voluntary choice.

7. No-Claim Discounts Amplify the Excess Decision

Many Australian insurers offer a no-claim discount (sometimes called a no-claim bonus) that reduces your premium by 10 per cent to 60 per cent over consecutive claim-free years. Lodging even a small claim resets this discount to zero and can cost you hundreds of dollars in future premiums.

When your excess is high and a claim is small, you may choose to pay for the damage yourself to preserve your no-claim discount. This strategy works only if you can afford the repair cost and if the discount saving over the next few years exceeds what you would have paid out-of-pocket.

8. Review Your Excess Annually

Your financial situation and risk profile change. A A$1,500 excess that made sense when you were single and renting may be too high once you have a family and a mortgage, or vice versa. When your policy renews, compare what you are paying in premiums against the excess you have chosen and adjust if needed.

Most insurers let you change your voluntary excess at renewal without penalty. Use this opportunity to rebalance the trade-off and ensure the policy still fits your budget and your ability to cover a claim.

Common Mistakes to Avoid

Setting the excess too high to chase the lowest possible premium, then finding yourself unable to afford the out-of-pocket cost when you need to claim, is the most frequent error. Equally wasteful is choosing a zero or very low excess and paying inflated premiums year after year when you have the savings to cover a moderate excess comfortably.

Failing to account for compulsory and age-based excesses when selecting your voluntary amount can also leave you with an unexpectedly large total. Always read the full excess breakdown in the PDS before you commit.

Conclusion

Your insurance excess and premium are two sides of the same financial equation. A higher excess cuts your upfront cost but raises what you pay if you claim; a lower excess does the reverse. The right choice depends on your emergency savings, your claims history, and your comfort with risk. Before deciding, read the Product Disclosure Statement (PDS) and the Target Market Determination (TMD), run the numbers for your own situation, and consider obtaining advice from a licensed insurance adviser to ensure the balance suits your needs.

General Advice Warning: This article provides general information only and does not take into account your objectives, financial situation, or needs. Before acting on any information in this article, you should consider whether it is appropriate for you, read the relevant Product Disclosure Statement (PDS), and consider obtaining personal advice from a licensed adviser. Cover terms, excesses, and availability vary by insurer and by state or territory. Always confirm current details with a licensed insurance adviser for your personal circumstances.