What does the term "deductible" mean in an insurance policy?

The term "deductible" in an insurance policy refers to the specific amount the insured must pay out-of-pocket before the insurance company begins to cover the costs associated with a claim. This mechanism serves to share the financial responsibility between the insurer and the insured, acting as a cost containment feature for insurers. For example, if an insured has a deductible of $500 on their policy, they must pay that amount themselves for any claim incurred before the insurer contributes.

This arrangement encourages policyholders to manage smaller losses on their own, fostering a sense of personal responsibility while allowing the insurer to limit their overall exposure to frequent, minor claims. The deductible can be a fixed amount or a percentage of the loss, depending on the specifics of the policy. By understanding how deductibles work, insured individuals can make more informed decisions when selecting insurance coverage and determining appropriate coverage limits to suit their needs.