What is a 'deductible' in insurance?

A deductible in insurance is the amount an insured individual is required to pay out-of-pocket before their insurance coverage begins to cover the remaining costs of a claim. This is a crucial concept because it emphasizes the shared financial responsibility between the insurance company and the policyholder. By having a deductible, insurance companies can reduce the number of small claims they receive and encourage policyholders to be more cost-conscious about their healthcare or property expenses.

For example, if someone has a deductible of $1,000 and they incur $3,000 in medical expenses, they would need to pay the first $1,000 themselves, and then the insurance would cover the remaining $2,000. This mechanism helps keep premiums lower since it discourages people from making claims for minor issues and ensures that insurance is used primarily for larger, unavoidable costs. Understanding this concept is essential for anyone navigating insurance options, as it directly affects out-of-pocket expenses and overall financial planning.