What is a deductible in an insurance policy?

A deductible in an insurance policy refers to the initial amount of loss that the insured must pay before the insurance coverage kicks in. This mechanism is designed to encourage responsible use of insurance and to prevent minor claims from being filed, which can increase administrative costs for insurance providers.

When an insured party suffers a loss, they first cover the deductible amount out of their own pocket. Only after that amount is satisfied does the insurance company begin to pay for the losses, up to the policy limits. This structure not only helps to keep insurance premiums more affordable but also ensures that the insured retains some financial responsibility for their claims, which can lead to better risk management and fewer claims overall.