Deductible
The amount you pay out-of-pocket on a covered claim before your insurance begins paying.
A deductible is the dollar amount you must pay yourself before your insurance policy pays anything on a claim. For example, with a $1,000 deductible and a $5,000 covered loss, you pay the first $1,000 and the insurer pays the remaining $4,000. If the loss is less than your deductible, you pay the entire cost and do not file a claim.
Deductibles serve two purposes: they reduce moral hazard (discouraging small, frivolous claims) and they lower premium costs for policyholders willing to retain more risk. Higher deductibles mean lower premiums; lower deductibles mean higher premiums. Most financial advisors suggest choosing the highest deductible you can comfortably afford to pay from savings.
Some policies use percentage deductibles instead of flat amounts. Homeowners insurance in hurricane or hail zones commonly carries a 1–5% wind/hail deductible calculated as a percentage of the dwelling coverage limit—on a $400,000 home with a 2% deductible, that's $8,000 out of pocket before any wind claim is paid.
Real-World Example
When a tree fell on the garage roof causing $7,500 in damage, the homeowner paid her $2,000 deductible and received $5,500 from the insurer.