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

The term 'deductible' in an insurance policy refers specifically to the amount that the policyholder must pay out-of-pocket for covered expenses before the insurance company begins to make payments. This concept is essential in insurance policies, as it helps to share the costs between the insurer and the insured, effectively managing risk and reducing the frequency of small claims.

For example, if an individual has a deductible of $500 and incurs a medical expense of $1,000, they are responsible for paying the first $500; the insurer would then cover the remaining $500, subject to any co-payments or coinsurance that may apply after the deductible is met. This mechanism encourages policyholders to be cautious with their claims and helps keep insurance premiums manageable.

Understanding deductibles is crucial for consumers when selecting their insurance plans, as a higher deductible typically results in lower premiums, while a lower deductible can lead to higher premiums but less out-of-pocket expense when a claim is made.