What is a 'deductible' in the context of insurance?

A deductible is a specific amount that the insured must pay out of pocket before the insurance coverage kicks in and the insurer will begin to cover the remaining costs of a claim. This concept is fundamental in insurance as it helps to share the risk between the policyholder and the insurer. By having a deductible, insurance companies can reduce the number of small claims they handle, which can help keep premiums lower.

When a claim is made, the deductible is subtracted from the total claim amount, meaning the insurer only pays the amount that exceeds the deductible. For example, if someone has a deductible of $500 and experiences a loss of $2,000, they will pay the first $500, and the insurance company will cover the remaining $1,500.

Understanding the role of the deductible is crucial for policyholders when purchasing insurance, as it can affect their premiums and out-of-pocket costs when they need to use their policy.