What does the term 'deductible' refer to in an insurance policy?

The term 'deductible' in an insurance policy refers to the amount that the policyholder is required to pay out of pocket before the insurance coverage takes effect. This amount is subtracted from the total claim amount, meaning that the insurer only pays for the amount that exceeds the deductible threshold. Deductibles serve to encourage policyholders to take care of minor damages or losses themselves and reduce the frequency of small claims, which can help keep insurance premiums lower over time.

In practical terms, if an individual has a deductible of a certain amount, they would first need to cover that amount in expenses before their insurer contributes to any covered losses. This model promotes a sense of shared responsibility between the insurance provider and the policyholder and is a fundamental aspect of many types of insurance, including health, auto, and homeowners insurance.