What does a deductible refer to in an insurance contract?

A deductible in an insurance contract is defined as the amount the policyholder must pay out of pocket before the insurer begins to cover the remaining costs associated with a claim. This concept is integral to many insurance policies, including health insurance, auto insurance, and homeowners insurance.

By requiring a deductible, insurers encourage policyholders to share in the risk and control smaller claims, as policyholders must first cover that initial amount. For example, if a homeowner has a deductible of $1,000 and incurs $5,000 in damage, they would need to pay the first $1,000 themselves before the insurance company pays the remaining $4,000.

Understanding the role of the deductible helps policyholders grasp their financial responsibility and the mechanics of how their insurance coverage functions when they need to file a claim.