Final answer:
A higher deductible does not reduce coverage but reduces the insurance premium because it lowers the insurance company's risk. Deductibles, copayments, and coinsurance are ways to share costs with the policyholder, encouraging careful behavior and reducing the chances of moral hazard in insurance practices.
Step-by-step explanation:
It is false that a higher deductible reduces the amount of coverage provided by homeowner's insurance; instead, it reduces the premium that one pays for the insurance.
A deductible is the amount a policyholder must pay out of pocket before their insurance coverage begins to pay for a covered loss.
Choosing a higher deductible means the policyholder is agreeing to take on more financial responsibility in the event of a claim, which reduces the insurance company's risk exposure.
As a result, the insurance company charges a lower premium.
Insurance companies use deductibles as a way to reduce moral hazard, the tendency for insurance policyholders to take greater risks because they know the insurance will cover losses.
If policyholders know they will bear some of the cost burden through deductibles, copayments, or coinsurance, they are likely to be more cautious, leading to fewer and smaller claims.
This approach is used across various types of insurance policies, including auto, health, and homeowner's insurance.