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

The purpose of a deductible in an insurance policy is to require the insured to pay a portion of the loss before the insurer steps in to cover the remaining costs. This mechanism serves multiple functions, including sharing the financial responsibility between the insurer and the insured, which can help reduce moral hazard—where the insured might take undue risks if they are fully covered. By having a deductible in place, the insured is incentivized to avoid unnecessary claims and take reasonable care to prevent losses, as they will be financially responsible for the initial amount specified in the deductible.

Furthermore, deductibles can influence the overall cost of the policy. Usually, higher deductibles result in lower premiums, as the insurer is exposed to less risk by having the insured cover a larger portion of any potential loss. However, the primary function remains a cost-sharing measure in the event of a claim, establishing a threshold that must be reached before the insurance benefits are activated.