What does a "deductible" in insurance refer to?

A deductible in insurance is a specified amount that a policyholder is responsible for paying out-of-pocket before the insurance coverage kicks in to pay for a claim. This means that when a claim is filed, the insurer will first deduct this fixed amount from the total loss, and only then will cover the remaining costs as stipulated by the insurance contract.

For instance, if a policyholder has a $500 deductible and files a claim for $2,000, they must pay the initial $500 themselves. The insurer will then cover the remaining $1,500. This arrangement can also influence the premium since higher deductibles typically lead to lower insurance premiums, reflecting the cost-sharing aspect between the insurer and the policyholder in managing risk.

Understanding this important principle allows policyholders to make informed decisions regarding their coverage options and financial responsibilities in the event of a claim.