How does the 'deductible' work in insurance policies?

The deductible in insurance policies refers to a specified amount that the insured must pay out of their own pocket before the insurer begins to cover any claims. This means that when a claim arises, the insured is responsible for covering expenses up to the deductible amount, which helps to mitigate the insurer's risk. Once the deductible is met, the insurer will then pay for the remaining eligible expenses according to the terms of the policy.

Understanding this concept is crucial, as it directly impacts the financial responsibilities of the insured and can affect the overall cost of insurance premiums. Higher deductibles often lead to lower premiums, while lower deductibles typically result in higher premiums. This mechanism encourages policyholders to take some level of financial responsibility before the insurer intervenes, thereby reducing the frequency of smaller claims.