What does the term "deductible" signify in an insurance policy?

The term "deductible" in an insurance policy refers to the specific amount that the insured must pay out of their own pocket before the insurance coverage will begin to pay for a covered loss. This mechanism serves a dual purpose: it helps to reduce the frequency of small claims by requiring the insured to bear the initial costs, and it lowers the overall cost of insurance premiums since the insurer is not liable for the initial portion of the loss.

When a loss occurs, the insured must first cover the deductible amount. Only after this threshold is met will the insurance company step in to cover the remaining costs up to the policy limits. This structure encourages policyholders to take greater care in avoiding losses since they are responsible for the initial deductible amount.

Understanding this term is critical, as it plays a vital role in how claims are processed and the financial responsibilities of the insured in the event of a loss.