Deductible

What Is a Deductible?

A deductible is the fixed amount a policyholder must pay toward a covered loss before an insurance policy begins paying for the rest. If a claim is larger than the deductible, the insurer typically pays the difference, up to the policy's policy limit. If the loss is smaller than the deductible, the insurer usually pays nothing.

For a hypothetical example, suppose a covered car repair costs 2,000 and the policy has a 500 deductible. The policyholder pays the first 500, and the insurer pays the remaining 1,500.

How Deductibles Work

Deductibles appear in many types of coverage, including auto, homeowners, and health insurance. They usually apply once per claim, though some policies set a deductible per year or per event. Certain policies, particularly those covering some natural disasters, express the deductible as a percentage of the property's insured value rather than a flat dollar amount.

The size of the deductible influences the insurance premium. Generally, a policyholder who accepts a higher deductible takes on more of the cost of small losses, and the insurer often charges a lower premium in return. A lower deductible usually means a higher premium. Neither arrangement is inherently better. The right balance depends on how much out-of-pocket cost a person could comfortably absorb.

In health insurance, the deductible is the amount a member pays for covered care before the plan begins sharing costs under its standard terms. Some preventive services are often covered before the deductible is met. After it is met, copayment and coinsurance rules may apply.

Deductibles Versus Tax Deductions

The word also appears in tax law, where a tax deduction reduces the amount of income subject to tax. That is a different concept. A tax deduction does not involve an insurer or a claim. It changes the income figure used to calculate tax owed. Readers encountering the term in a policy document should confirm which meaning applies.

Why It Matters to Investors

Deductibles affect how insurers price risk and how they structure their losses, which can matter when evaluating insurance companies. Investors studying an insurer may look at how its premiums and claims relate to the deductibles in its policies. For a policyholder, the deductible is one of several factors in a policy, alongside the premium, coverage limits, and exclusions.