What is the purpose of deductibles in insurance policies?

The purpose of deductibles in insurance policies primarily serves to lower the premium costs for policyholders. When an insurance company includes a deductible in the policy, it requires the insured to pay a certain amount out-of-pocket before the insurance coverage kicks in for a loss. This arrangement benefits both the insurer and the insured. For the insurer, having a deductible means that they are taking on less risk, which allows them to lower the overall premium costs for the policyholder. For the insured, opting for a higher deductible often results in a reduced premium, making insurance coverage more affordable.

In contrast, increasing coverage limits refers to enhancing the maximum amount that an insurer will pay for a covered loss, which does not directly relate to the function of deductibles. Providing a flat rate for claims means the insurer would pay a predetermined amount regardless of the losses incurred, which contradicts the purpose of a deductible. Also, ensuring full reimbursement for losses would eliminate the need for a deductible entirely, as it implies that the insurer would cover all costs without any out-of-pocket expense to the insured. Thus, the correct understanding of deductibles revolves around their role in reducing premium costs rather than changing coverage levels or reimbursement terms.