What is a deductible in an insurance policy?

A deductible is an amount that the insured is responsible for paying out of pocket before the insurance coverage starts to pay on a claim. This mechanism serves multiple purposes: it encourages policyholders to manage their claims responsibly, reduces the frequency of small claims which can burden the insurance system, and ultimately contributes to keeping premiums more affordable.

When a claim is filed, the deductible is deducted from the claim amount, meaning that the insurer only pays for the portion that exceeds the deductible. For example, if the insured has a deductible of $1,000 and they file a claim for $5,000, the insurance company will pay $4,000. Understanding this concept is crucial for individuals managing their insurance needs, as it impacts how they plan for potential out-of-pocket expenses in the event of a loss.

The other options refer to different aspects of insurance. Coverage limits indicate the total amount payable by an insurer and are not the same as a deductible. The fee for setting up a policy is typically associated with administrative costs rather than the deductible concept. Lastly, maximum payouts pertain to the cap on how much the insurer will pay for a specific claim, which again is distinct from the deductible that must first be met by the insured.