What does the term "deductible" mean in the insurance sector?

In the insurance sector, the term "deductible" specifically refers to the amount that a policyholder must pay out-of-pocket before the insurance company begins to cover the costs of a claim. This concept is crucial as it establishes a threshold that must be met by the insured before any benefits from the policy can be accessed. For instance, if a policy has a deductible of $1,000, the insured must pay the first $1,000 of any covered expenses themselves, after which the insurance will kick in to cover the remaining costs according to the terms of the policy.

This mechanism serves several purposes. It helps to prevent minor claims, promoting more responsible claims behavior by ensuring that policyholders share in the cost of their claims, and it can also help lower premiums, as higher deductibles typically lead to lower monthly insurance costs. Understanding this aspect of insurance is essential for managing risk and cost-sharing effectively between the insurer and the insured.