What is a Deductible in insurance terms?

A deductible is defined as the out-of-pocket amount that a policyholder must pay before their insurance coverage kicks in. This means that for a claim to be processed by the insurance company, the policyholder must first cover expenses up to the set deductible limit. For example, if a policy has a deductible of $1,000 and the policyholder files a claim for $5,000, the insurance company will only pay for the amount exceeding the deductible, in this case, $4,000.

This concept is important in insurance because it influences policyholders' decisions regarding their coverage and premium costs. Typically, higher deductibles can lead to lower premium payments since the policyholder is assuming more financial responsibility before the insurer begins to pay. Understanding deductibles helps individuals and businesses budget for potential out-of-pocket costs when considering insurance policies.