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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**Think of insurance coverage like a circle**, with higher cost items at the outer part of the circle, and cheap things near the centre.
A bigger circle is more expensive (Because it provides more coverage).
That’s good in terms of protection – it stops really high costs from bankrupting you.
But those high cost problems are rare. It’s small issues that might cost a thousand dollars or less – but which you can more easily cover the cost of – that are common, and from the insurance company’s perspective they still require manpower and repair shops to fix, so it makes their premiums more expensive.
**A deductible turns that circle into a donut** – the coverage doesn’t start until above a certain cost, so you can basically pay less for insurance (because the insurance company doesn’t have to worry about covering those cheap, but frequent, problems), whilst still having the same coverage for bigger issues that would have been more expensive (but are also less likely to occur).
By increasing the “hole” in the donut, you can reduce your premium – but that also reduces the coverage of next-cheapest issues, so you need to make sure you can afford them.
It’s why deductibles are usually offered with some flexibility – so people can adjust the size of the “donut hole” to suit their needs and budget.
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