What does the term "deductible" mean in an insurance policy?

In an insurance policy, the term "deductible" refers specifically to the out-of-pocket amount that the policyholder must pay for covered expenses before the insurance company begins to pay its portion of the claim. This concept is essential as it helps define the cost-sharing aspect of an insurance policy. For example, if a policy has a deductible of $1,000, the insured must cover the first $1,000 of any claim costs. After this amount is met, the insurer will provide benefits according to the terms of the policy.

Understanding the function of the deductible is crucial for policyholders, as it impacts both premium costs and the overall financial responsibility in the event of a claim. Typically, higher deductibles lead to lower premium rates, encouraging policyholders to share some of the risks associated with their coverage.