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

The purpose of a deductible in an insurance policy is to lower the premium costs by reducing the insurer's liability. A deductible is the amount that policyholders agree to pay out of pocket before their insurance coverage kicks in for a claim. By setting a deductible, insurers can reduce their overall risk and liability, which allows them to offer lower premium rates. When policyholders opt for a higher deductible, they are essentially taking on more financial responsibility in the event of a loss, which is reflected in the reduced premiums. This mechanism encourages responsible behavior regarding claims, as the insured has a vested interest in both the expenses incurred and the claims filed. Thus, it strikes a balance between the insurer's risk management and the affordability of coverage for the insured.