In insurance terminology, what does the term “deductible” mean?

The term “deductible” in insurance refers specifically to the amount that the insured person must pay out of their own pocket before the insurance company begins to cover the remaining costs of a claim. This is a critical concept as it directly impacts the policyholder's financial responsibility in the event of a loss.

For instance, if a policy has a deductible of $500, this means that the insured must pay the first $500 of any claim before the insurer will contribute to the remaining expenses. The purpose of a deductible is twofold: it can help to lower insurance premiums by reducing the frequency of small claims and it encourages insured individuals to be more cautious, as they have a financial stake in any claims made.

Understanding deductibles is essential for anyone entering into an insurance policy, as it affects how much out-of-pocket expense they will need to consider when assessing the financial impact of a covered event.