Scenario: I pay X amount of dollars per month for car insurance. I have all 4 tires stolen from my vehicle overnight. I submit a claim with my insurance company to repair any damages. I now pay a **hefty** X amount of dollars for the event that has occurred.
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A deductible isn’t a charge or fee, it’s the limit you set for yourself on the amount you can reasonably cover toward a loss. In life, most people have big expensive things that they cannot buy or fix casually or spontaneously. They had to plan carefully to buy them or lucked into them in the first place. These are things like houses, cars, a farmer’s livestock or harvester machine, a company’s ship, your health, the retirement savings you would have left for your family over thirty years. If one of these is suddenly lost or destroyed (or you die in the last case), there’s a huge hole you have to fill but you can’t. So you take out a bet against yourself. You bet each year that you’ll incur this loss. If you lose, the event didn’t happen and you lose your wager. It’s unlikely and the wager was small so no big deal. If you win though, something terrible happened but you win enough money to be made whole…mostly. That bet is insurance. By taking it, you’re caping your potential loss at an amount you can afford to live with. That amount is your deductible. The bet gets cheaper the higher that deductible is. Insuring damage to a home above $5k is cheaper than damage above $1k. Fewer things will do $5k in damage and the payout will be less. But if $5k is more cash than you just have floating around for incidentals, you might want more insurance. Of course the max payout also affects the price.
There is a caveat on deductibles – If the loss happens because of another person or company’s actions, you and your insurance company may be able to make them and their insurance company pay for it. If they do, you get your deductible back since someone else made you whole. It if’s your fault or the fault of something like a storm, this doesn’t happen.
Interesting side note – Many wealthy people and companies balk at insuring things that all things considered are not that expensive for them or where they do so much activity that annual losses are inevitable and any insurer would functionally have to charge them for them anyway. So a major consulting company may not want to pay premiums for health insurance or business car insurance because it is very rich and with a 100k strong workforce, people are getting sick and getting into car accidents on any given day more or less. In these cases, insurers will often sell administration only packages where the company pays the actual claim and they just do the paperwork, adjusting, and compliance. They can also sell surety or bond products where the insured is responsible for paying the claim, but if they don’t the insurer will pay it and then take on the task of recovering the money from their client by force if necessary.
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