What is the purpose of a deductible in an insurance policy?

The purpose of a deductible in an insurance policy is to share the risk between the insurer and the insured. When a policyholder files a claim, the deductible represents the amount that they are responsible for paying out of pocket before the insurance coverage kicks in. This mechanism helps ensure that the insured has a stake in the loss, which can discourage frivolous claims and encourage cautious behavior regarding risks. By sharing a portion of the risk, both parties are more invested in managing claims effectively.

Additionally, the presence of a deductible often allows for lower premium costs, as higher deductibles are typically associated with reduced risk for the insurer. However, the primary function is to establish a shared responsibility in the event of a loss. This collaborative approach helps maintain the sustainability and affordability of insurance coverage for all parties involved.