How does a Deductible affect the cost of an insurance policy?

A deductible is a predetermined amount that the insured must pay out of pocket before the insurance coverage kicks in for a claim. When a policy includes a deductible, it typically leads to a decrease in the insurance premium. This is because a higher deductible generally means that the insured is assuming more financial risk, which in turn lowers the insurance company's cost for covering potential claims. Insurers can afford to reduce premium rates since they anticipate that some minor claims will not be submitted due to the deductible, thus lowering the number of small claims they need to manage.

The relationship between deductibles and premiums reflects the concept of risk management in insurance. By requiring customers to pay a certain amount before coverage applies, insurance companies can reduce the volume of minor claims, allowing them to keep premiums more affordable overall. Consequently, the presence of a deductible incentivizes policyholders to only file claims for more significant losses, which positively influences the overall cost structure of the insurance policy.