What is the deductible in an insurance policy?

The deductible in an insurance policy refers to the amount that the policyholder is required to pay out of pocket before the insurance company begins to pay for covered losses. This mechanism is designed to share the financial responsibility between the insurer and the insured, encouraging the insured to manage smaller claims themselves and keeping insurance premiums more affordable.

When a claim is made, the deductible is deducted from the total payout; for example, if the covered loss is $10,000 and the deductible is $1,000, the insurance company would pay $9,000. This means that the insured will need to cover the initial $1,000 in expenses before the benefits of the insurance policy kick in.

Understanding the concept of deductibles is crucial for policyholders as it directly affects the out-of-pocket costs they may incur when filing a claim, as well as the overall premium of their insurance policy.