Deductible
Definition
The amount the policyholder must pay out of pocket before the insurance company begins to pay on a claim. Deductibles reduce premiums and prevent small claims.
Example
A homeowner has a $1,000 deductible on their property policy. A windstorm causes $8,000 in damage. The homeowner pays the first $1,000, and the insurer pays the remaining $7,000.
In Practice
Higher deductibles typically result in lower premiums. Deductibles can be fixed dollar amounts or percentages of the insured value. Some policies have separate deductibles for different perils (e.g., hurricane deductibles). Deductibles apply per claim, not per policy period. Policyholders should choose deductibles they can afford to pay.