What is the purpose of a deductible in insurance?

A deductible serves as a mechanism in insurance policies that requires the policyholder to pay a specified amount out-of-pocket before the insurer will cover the remaining costs of a claim. This amount is predetermined and is outlined in the policy. The primary purpose of a deductible is to share the risk between the insurer and the policyholder, encouraging the policyholder to take care in preventing losses.

For instance, if a policyholder has a deductible of $1,000 and files a claim for $5,000 in damages, they would need to pay the first $1,000 themselves, while the insurance company would cover the remaining $4,000. This setup not only helps prevent minor claims, which can be costly for insurers, but also keeps premiums more affordable by allowing insurers to pass some of the risk to the policyholder. Thus, the correct understanding of a deductible highlights its role in managing both costs and risk in the insurance relationship.