What does 'deductible' refer to in an insurance policy?

In the context of an insurance policy, a 'deductible' represents the amount that the policyholder is required to pay out-of-pocket before the insurance coverage begins to pay for a claim. This means that if a policyholder incurs a loss and files a claim, they must first cover the deductible amount specified in their policy. Only after this threshold has been met will the insurer take over and pay for the remainder of the claim up to the policy's limits.

This mechanism serves multiple purposes: it helps mitigate the insurer’s risk, as the policyholder shares in the cost of the loss, and it can also encourage responsible claim behavior, since individuals may be less likely to file small claims if they know they will have to pay a portion themselves. Understanding this concept is crucial because it directly affects the out-of-pocket expenses that a policyholder might face in the event of a claim.