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

A deductible serves as a specified amount that the insured must pay out-of-pocket before the insurance coverage kicks in for a claim. Its primary purpose is to reduce the loss amount that the insurer is responsible for covering. By having a deductible, the insured shares in the risk and costs of the loss, thereby discouraging frivolous claims and keeping premiums more affordable.

When a loss occurs, the deductible amount is subtracted from the total loss, which means the insurer only pays for the remaining amount above the deductible. For example, if the loss is $10,000 and the deductible is $1,000, the insurer will cover $9,000. This mechanism not only helps manage overall claims costs but also emphasizes the insured's commitment to sharing in financial responsibilities related to their policy.