What does "deductible" refer to in insurance?

The term "deductible" in insurance specifically refers to the amount that the insured is required to pay out of pocket before the insurance company will contribute toward a covered loss. This concept is fundamental to most types of insurance policies, as it establishes the portion of the risk that the insured retains.

By having a deductible, the insurer is able to reduce the number of small claims and encourage policyholders to take precautionary measures to avoid losses. In practical terms, if a policyholder experiences a loss that is covered by their policy, they first pay this predetermined deductible amount, and the insurance company subsequently pays the remaining costs up to the policy's limits.

This mechanism also directly impacts premiums; generally, a higher deductible can lead to lower premium costs, as the individual assumes more financial responsibility upfront. Understanding the role of deductibles is essential for policyholders, as it influences their financial planning and decision-making regarding insurance coverage.