What does a 'deductible' mean in an insurance policy?

In an insurance policy, a 'deductible' refers to the specific amount that the insured must pay from their own finances before the insurance company begins to cover the remaining costs of a claim. This means that if a loss occurs, the insured is responsible for paying up to that deductible amount, after which the insurer will cover the expenses associated with the claim, up to the limits specified in the policy.

This concept helps to reduce the number of small claims made to the insurer and encourages insured individuals to take more responsibility for their own expenses. For instance, if a policy has a deductible of $1,000 and an insured incurs a loss of $5,000, the insured would first pay the deductible amount of $1,000 and then the insurance company would cover the remaining $4,000.

Understanding the deductible is crucial for policyholders as it directly impacts their out-of-pocket costs in the event of a claim.