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

In an insurance policy, the term "deductible" specifically refers to the amount that the policyholder is required to pay out of pocket before the insurance company begins to cover the rest of the claim. This means that if a loss occurs and a claim is filed, the insurer will subtract the deductible amount from the total claim payout. For example, if a policyholder has a deductible of $1,000 and they incur a loss of $5,000, they would need to pay the first $1,000, and the insurance company would pay the remaining $4,000.

This concept plays a critical role in managing risk for both the insurer and the insured. By having a deductible, policyholders have a stake in the financial outcome, which can help discourage minor claims and keep overall premiums lower. Understanding how deductibles work is essential for anyone involved in insurance, as it affects both claim payments and premium costs.