What is the purpose of deductibles in an insurance policy?

Deductibles play a crucial role in the structure of insurance policies by serving multiple purposes, with one of the primary functions being to prevent the coverage of small claims. By requiring policyholders to pay a predetermined amount out-of-pocket before the insurance company begins to cover the costs, deductibles discourage frivolous claims and encourage more responsible use of insurance.

This mechanism effectively helps to reduce the overall premium costs for policyholders, as insurers recognize that they will not have to pay for minor incidents. Thus, the presence of a deductible creates a shared financial responsibility between the insurer and insured, which can enhance the profitability for the insurance company while keeping premiums more affordable for consumers. This balance is important for the sustainability of insurance practices, as it drives the focus on larger, more significant claims that are truly in need of coverage.