What is an insurance policy's "deductible"?

The deductible in an insurance policy refers to the specific amount that the policyholder must pay out of pocket before the insurance coverage kicks in and the insurer begins to pay for a claim. This amount is established in the policy and is designed to mitigate minor claims and encourage the policyholder to be cautious in filing claims.

For example, if a policy has a deductible of $500 and the insured incurs a loss of $1,500, the policyholder would be responsible for the first $500, after which the insurance company would cover the remaining $1,000 of the claim. This means that the deductible serves as a shared responsibility between the insurer and the insured, helping to keep premiums more affordable, as higher deductibles typically lead to lower insurance costs.

This fundamental concept is crucial for policyholders to understand since it affects their out-of-pocket expenses during the claims process and overall insurance costs.