What is a deductible in an insurance policy?

A deductible in an insurance policy refers to the specific amount that the insured must pay out-of-pocket for covered expenses before the insurance company begins to pay its share of the costs. This means that if a claim is made, the insured will first cover the deductible amount. For example, if a policy has a $1,000 deductible, the insured needs to pay the first $1,000 of any claim, and then the insurance provider will pay for the remaining eligible expenses.

This feature serves multiple purposes, including encouraging policyholders to manage smaller claims on their own and reducing the overall cost of premiums, as higher deductibles typically result in lower premium rates. Understanding the role of deductibles is essential for policyholders to effectively budget for potential out-of-pocket expenses, as it directly impacts how much they need to pay when filing a claim.