What is the purpose of deductibles in insurance policies?

Deductibles serve an essential role in insurance policies by reducing the insurer's payment for claims. When a policyholder incurs a loss, the deductible is the amount that they must pay out of pocket before the insurer covers the remaining costs. This mechanism helps insurers manage risk and encourage policyholders to share in the financial responsibility for minor claims.

By requiring a deductible, insurers are able to limit their exposure to small, frequent claims that could otherwise lead to increased overall costs. In essence, deductibles help to keep premiums more manageable and focus coverage on larger, more significant losses. Therefore, the correct understanding of a deductible revolves around its function in claims processing, where it essentially acts as a threshold that the insured must meet before their coverage kicks in.