What is the purpose of an insurance deductible?

The purpose of an insurance deductible is to establish a specified amount that the insured must pay out-of-pocket before the insurance coverage kicks in. This is a key feature of many insurance policies as it encourages policyholders to take on some level of financial responsibility for smaller claims, which can help keep insurance premiums lower.

When a claim is filed, the deductible amount is deducted from the total claim payout, meaning the insurer only pays for the costs that exceed the deductible. This mechanism helps to discourage frivolous claims and ensures that insurance is being used for significant losses rather than minor expenses. By having a deductible, both the insurer and insured share the risk, promoting a more sustainable insurance model.

Understanding this concept is crucial for effective risk management, as recognizing the implications of deductibles can influence decisions about policy selection and risk retention strategies.