What is a franchise in insurance: in simple words

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If you are offered a franchise at the office of an insurance company, do not rush to rejoice. Opening your own office, building a business, and making money in this way will not work. But to save is quiet.

A franchise is an important element of the contract. It affects the number of possible payments, so you need to clearly understand what you are dealing with and what you can count on. 

Franchise translated from French is a benefit. The insurance company receives it since it is exempted from damages in the agreed amount. 

Often the deductible is found in the policies of such types of insurance as:

  • motor vehicle insurance – CASCO and OSAGO, 
  • life and health insurance, 
  • insurance for those traveling abroad,
  • property insurance,
  • insurance of pledged real estate under a mortgage agreement. 

Types of franchises

The franchise can be conditional or unconditional.

With a conditional franchise, a certain amount is prescribed in the contract. If the size of the loss is less, no payment is due at all. But if it is more, then the damage will be compensated in full within the agreed amounts. 

Example. The contract states that if the amount of damage is less than 50 thousand rubles, then the costs are borne by the client. If more, then the insurance pays the damage in full… The important point here is the amount of damage.

With an unconditional deductible, the agreed amount is withheld from compensation for the entire duration of the contract and does not depend on the circumstances of the damage. This type of franchise is most common.

Insurance franchise

Example. Sergey decided to issue a CASCO policy for his car. The insurance company, to which he contacted, offered him to sign an agreement with an unconditional deductible: according to him, if the car is damaged in the amount of fewer than 50 thousand rubles, then all costs are borne by Sergey himself, and the insurance company does not pay anything… There was an option with insurance without a deductible, but 30% more expensive. Sergei weighed all the pros and cons for a long time and nevertheless issued a policy with a franchise. It’s a shame that in the event of an insured event as a result of a pebble or a small scratch that came from the road, you may have to pay for the repair work yourself, but in case of a serious problem, the insurance will help. The agreed 50 thousand rubles will still fall on Sergei’s shoulders, but the rest should be compensated by the insurance…

The policy may provide for such a moment: if the accident has a specific culprit and it is not Sergey, then this culprit (or the culprit’s insurance company) will have to compensate, including the amount of the deductible. 

What else does compensation depend on?

Payments under a policy with a deductible are possible in two main options. 

  • In the first case, the client receives compensation, from which the agreed amount has already been deducted. He adds it himself for the necessary restoration work.
  • In the second case, the person first gives the amount of the deductible to the insurance, and she already pays for the necessary work.

There are also options for calculating the amount of the franchise itself. 

  • The contract may stipulate a specific amount that is withheld regardless of the amount of damage. 
  • A certain percentage of the total amount of losses may also be provided. 

Also, the franchise can be dynamic. Then the amount that is withheld depends on the terms of the contract. For example, it may be prescribed that with each new insured event, the amount that will be withheld will be less.

With a temporary franchise, timing is of fundamental importance. The contract stipulates a certain period during which compensation for damage is not due. For example, in the first month after signing the contract.

In the contract, several calculation options can be provided at once for different situations… Then everything will depend on the circumstances under which the insured event occurred. Therefore, the agreement should be read with utmost care. After all, your signature on the contract means that you agree with all the conditions.

What is zero deductible?

It happens that the contract mentions a zero deductible. Basically, this means there is no franchise. But also a zero deductible can be established only for specific insured events, and for the rest, it is still possible to deduct a certain amount from compensation. 

Advantages and Disadvantages of Deductible Insurance

The purchase of insurance should be approached carefully, so you should clearly understand the pros and cons.

  • The price of a policy with a deductible is lower than without it. The higher the deductible, the cheaper the policy. It all depends on the situation, and sometimes on the personal qualities of the policyholder. If the insured event does not occur, then we can assume that you have successfully optimized the cost of insurance. 
  • If several events occur at once during the insurance period that deprives you of the right to payment, your costs may be comparable to the cost of the policy itself. Sometimes just one case is enough: for example, when insuring those traveling abroad, if the deductible is 30 euros and you had to consult a doctor for advice, the appointment itself may cost the same 30 euros. And the insurance itself may well cost less than 30 euros if we are talking about a short trip.
  • Sometimes it can take some time to process the policy. But insurance with a deductible is always the easiest and fastest to issue.

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