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Choosing Insurance Premium vs Excess in a Novated Lease

When we choose car insurance in a normal (post-tax) environment, the thinking is usually simple:

“Premium is $1,500 per year with $700 excess.”
“Or I can reduce the premium to $1,000 if I increase the excess to $2,000.”

Straightforward.

However, inside a novated lease (NL), the maths changes — because both your premium and excess (if you ever need to pay it) are typically paid with pre-tax dollars, which means you enjoy an effective discount equivalent to your marginal tax bracket + 2% medicare levy.1

That may change how you approach the trade-off between premium and excess.

Step 1: Translate Everything Into Post-Tax Equivalent

Assume you are in the 37% marginal tax bracket + 2% Medicare levy.

Every $1,000 paid pre-tax only “costs” you:

$1,000 × (1 – 0.39) = $610

Now reframe the two insurance options.

Option A

  • Premium: $1,500
  • Excess: $700

Effective post-tax equivalent:

  • Premium: 1,500 × 0.61 = $915
  • Excess: 700 × 0.61 = $427

Option B

  • Premium: $1,000
  • Excess: $2,000

Effective post-tax equivalent:

  • Premium: 1,000 × 0.61 = $610
  • Excess: 2,000 × 0.61 = $1,220

Outside NL, the jump from $700 excess to $2,000 excess feels like an extra $1,300 of risk.

Inside NL, the difference in "pain" becomes:

$1,220 − $427 = $793 difference

That framing shift alone can change how the decision feels.

The General Principle: Insurance Has Negative Expected Value

There’s a fundamental actuarial truth:

The expected value (EV) of insurance is always negative.

In other words, on average and over time, we lose money when we buy insurance.

If it were positive, insurers would go broke.

Insurers price individual policies using actuarial techniques based on:

  • Expected loss
  • Administrative costs
  • Profit margin
  • Risk premium

The risk premium is what you pay for transferring uncertainty.

On average, you pay more than you receive. That is how insurance works.

When Higher Excess May Be Rational

Higher excess + lower premium may make sense if:

  • You believe you are a low-risk driver
  • You have strong financial buffers
  • A $2,000 outlay would not materially affect your finances
  • You are comfortable accepting occasional volatility

In a novated lease context, remember:

  • The premium is certain (you always pay it).
  • The excess is probabilistic (you only pay if something happens).

If you believe your personal risk is lower than the insurer’s priced risk, shifting toward higher excess may be economically rational.

When Lower Excess May Be Rational

Lower excess may be worth paying for if:

  • You have higher accident frequency
  • You drive in high-risk environments
  • You value peace of mind highly
  • A sudden $2,000 payment would create stress

Insurance is not about maximising expected value.

It is about smoothing risk.

If a large unexpected expense would destabilise you financially or psychologically, paying extra premium can be rational even if mathematically suboptimal.

The Novated Lease Framing Effect

NL introduces two behavioural distortions:

  1. Premium feels cheaper because it is paid pre-tax.
  2. Excess also feels discounted, but it is hypothetical and distant.

This can lead to:

  • Overconfidence in taking higher excess
  • Or overbuying coverage because “it’s pre-tax anyway”

Both can be mistakes if not thought through properly.

A Structured Way to Decide

Ask yourself:

  1. What is the true post-tax equivalent cost of each option?
  2. If I had to pay the higher excess tomorrow, would it materially hurt?
  3. Is the insurer likely overpricing my personal risk?

If you are financially strong and low risk, higher excess often makes sense.

If you are financially tight or strongly risk-averse, lower excess may be justified.

Important Disclaimer

This is not financial advice.

It is a general framework for thinking about insurance decisions within a novated lease structure.

Always consider your own financial buffer, job stability, broader novated lease risks (e.g. total loss, redundancy), and personal risk tolerance before deciding.

This article provides general principles only — tailored advice requires consultation with a licensed financial adviser.

The key takeaway

If you remember nothing else:

Both the premium and the excess are effectively discounted inside novated lease environment, and this should be accounted for in determining the optimal combination based on your personal circumstances.

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  1. The "discount effect" is even higher for insurance premium as a portion is made up of GST which is effectively waived if your employer passes on GST saving of running costs. Excess does not typically attract GST therefore does not enjoy additional "GST discount". ↩