What is a deductible in an insurance policy?

A deductible in an insurance policy refers specifically to the amount that the insured person is required to pay out of their own pocket before the insurance coverage kicks in and the insurer begins to pay for a claim. This concept is crucial in insurance as it serves to share the risk between the insured and the insurer. By having a deductible, the insurer reduces the number of small claims they handle and encourages the insured to take on some responsibility for their claim, which can help reduce overall premiums.

For example, if an individual has a policy with a deductible of $500, and they incur a loss of $3,000, they will first need to pay $500, and then the insurance company would cover the remaining $2,500. Deductibles can vary based on the type of insurance and individual policy terms.

In contrast, the total cost of insurance premiums is unrelated to the deductible; it refers to the total amount paid for coverage over a policy period. Similarly, the amount paid by the insurer before coverage starts does not relate to deductibles, as coverage starts only after the deductible has been met. The maximum amount an insurer will pay for a claim is instead known as the policy limit, not the deductible itself. This understanding is vital for clients when reviewing