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

The function of a deductible in an insurance policy is to be the amount that the insured must pay out of pocket before the insurance coverage begins to pay for a claim. This means that when a covered loss occurs, the insured is responsible for covering the deductible amount first. Once this threshold is reached, the insurance company will then cover the remaining costs of the claim up to the policy limit.

This system serves multiple purposes. It encourages responsible use of insurance by discouraging small claims that can be managed without insurance. It also helps keep insurance premiums lower because the insured shares some of the risk with the insurer. In essence, by having a deductible, both the insured and the insurer have a defined financial responsibility in the event of a loss, which works to keep the insurance system efficient and sustainable.