What is the deductible in an insurance policy?

The deductible in an insurance policy refers to the specific amount that the insured must pay out-of-pocket for a covered loss before the insurance company begins to pay for the remaining costs. This is a crucial aspect of how many insurance policies operate, as it helps to share the risk between the insurer and the insured. When a claim is made, the insurer will subtract the deductible from the total claim amount, and only then will they cover the remaining costs as specified in the policy.

For example, if an individual has a deductible of $500 and they incur $2,000 in damages, they must pay the first $500, and the insurance company will cover the remaining $1,500. This mechanism encourages policyholders to think more carefully about smaller claims, while also ensuring that coverage is available for more significant losses.

Understanding the deductible is essential for policyholders as it impacts their out-of-pocket expenses when making a claim, as well as the premium they might pay—often, higher deductibles can lead to lower premium costs.