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

The term 'deductible' in an insurance policy refers to the amount that the insured is required to pay out-of-pocket before the insurance coverage begins to take effect. This means that when a claim is made, the insured must cover the deductible amount first, and only after that will the insurer pay the remaining costs, up to the limits of the policy.

For example, if a policy has a deductible of $1,000 and the total claim amount is $5,000, the insured would pay the first $1,000, and the insurance company would handle the remaining $4,000. This mechanism is used to reduce the number of small claims and to encourage policyholders to manage their risks more responsibly.

Understanding how deductibles work is crucial for both policyholders and adjusters, as it directly impacts how claims are processed and the financial responsibility of the insured in any given situation.