In an insurance policy, what does the term "deductible" signify?

The term "deductible" in an insurance policy refers to the out-of-pocket amount that a policyholder must pay before the insurance coverage becomes effective for a claim. This means that when an insured event occurs, the policyholder is responsible for covering expenses up to the deductible amount. Only after this amount has been paid will the insurer begin to pay for any covered expenses or losses.

For example, if a policy has a deductible of $500 and the total cost of a claim is $2,000, the policyholder must first pay the $500, and then the insurer will cover the remaining $1,500, provided that the claim is approved and falls under the policy's coverage.

This mechanism helps to share the risk between the insurer and the insured, as it requires the policyholder to take on some financial responsibility before the insurance coverage activates. Additionally, higher deductibles often lead to lower premium costs, as the insurer’s risk is reduced.