What is the purpose of an insurance deductible?

The purpose of an insurance deductible is to share the cost of a loss between the insurer and the insured. When a deductible is applied, the insured agrees to pay a specified amount out-of-pocket before the insurance coverage kicks in to cover the remaining costs associated with a claim. This mechanism serves several important functions: it encourages responsible behavior by the insured, as they may be more cautious with their property or minimize claims for smaller losses; it reduces the number of small claims, making the claims process more efficient for insurers; and it helps keep insurance premiums at a more manageable level, as insurers are not liable for every small loss.

By sharing the financial burden of a loss, deductibles foster a sense of shared responsibility between the insurer and the insured, ultimately promoting a more sustainable insurance system. This approach ensures that insurance serves as a safety net for more significant, unforeseen financial risks rather than covering all types of incidents.