What does the term 'deductible' refer to in an insurance policy?

The term 'deductible' in an insurance policy refers to the amount that the insured must pay out of pocket before the insurance coverage kicks in and the insurer begins to pay for a claim. This amount is specified in the policy details and serves as a cost-sharing mechanism between the insurer and the insured. For example, if a policy has a $1,000 deductible, the insured would need to cover the first $1,000 of any covered loss. Only after this deductible is met will the insurer start contributing to the claim amount, according to the policy limits.

This structure incentivizes insured individuals to be more cautious and reduces the number of small claims, as policyholders are likely to pay for minor expenses on their own. Understanding the deductible is crucial for anyone purchasing an insurance policy, as it directly impacts out-of-pocket costs during a claim.