What is a deductible in an insurance policy?

In an insurance policy, a deductible refers to the specific amount that the insured must pay out-of-pocket before the insurance coverage begins to pay for a covered loss. This amount is stipulated in the insurance contract and varies depending on the policy terms. The purpose of a deductible is to share the risk between the insurer and the insured; by requiring the insured to cover a portion of the loss, it helps to prevent small claims that could burden the insurance system and allows for lower premium costs.

For example, if a policy has a $500 deductible and a covered claim amounts to $2,000, the insured is responsible for the first $500, while the insurer will cover the remaining $1,500. This mechanism not only helps keep premiums more affordable but also encourages policyholders to be judicious in making claims.