What does the term "deductible" refer to?

The term "deductible" specifically refers to the amount that the insured must pay out of pocket before their insurance coverage becomes effective for a claim. This means that if a policyholder experiences a loss and files a claim, the deductible is the initial portion of the loss that they are responsible for paying. For example, if a policy has a $1,000 deductible, and the insured incurs a $5,000 loss, the insurer would only cover $4,000 after the deductible has been applied.

Understanding deductibles is crucial for policyholders because it directly affects the amount they will receive from their insurance in the event of a claim. Higher deductibles often lead to lower premium costs, while lower deductibles result in higher premiums. Therefore, recognizing how deductibles work helps individuals make informed decisions regarding their insurance policies.