Why do insurance policies include deductibles?

Insurance policies include deductibles primarily to discourage small claims. When a policyholder is required to pay a certain amount out of pocket before their insurance coverage kicks in, they are likely to think twice before filing claims for smaller amounts. This helps both the insurer and the insured in several ways.

From the insurer's perspective, by encouraging this practice, they can minimize the administrative burden and financial resources spent processing frequent, minor claims. This reduces overall costs associated with claim handling, which can contribute to lower premiums for policyholders in the long run.

For the insured, having a deductible can lead to a more thoughtful use of their insurance. Instead of relying on insurance for every minor incident, policyholders are incentivized to manage risks more responsibly and handle smaller losses themselves. Consequently, this leads to a more sustainable insurance model where resources are allocated more effectively to cover larger incidents that genuinely require insurance assistance.

Thus, the presence of deductibles primarily serves to prevent the filing of small claims, streamlining the claims process and benefiting both insurers and insured individuals.