A deductible is the amount you agree to pay out of your own pocket on a covered loss before your insurer pays the rest. If you have a deductible and file a claim, the insurer subtracts that amount and pays the remainder up to your limit. Deductibles are most common in property and health insurance, and they're a key reason premiums stay affordable.

Why it matters

Deductibles do two things. First, they keep the insurer from processing tiny, costly-to-handle claims, which lowers everyone's premiums. Second, they keep the insured with "skin in the game," reducing morale hazard—you're less likely to be careless when you'd bear the first chunk of any loss. Generally, choosing a higher deductible lowers your premium, and a lower deductible raises it.

A simple example

A hailstorm causes roof damage, and a contractor estimates the repair at a certain cost. If your policy has a deductible, you pay that deductible amount and your insurer pays the rest of the covered repair (up to your limit). If the damage were smaller than your deductible, the insurer would pay nothing and you'd cover it yourself.

Don't confuse it with…

A deductible is not the same as a premium (what you pay to keep the policy in force) or a copay/coinsurance (a percentage split of costs). It's also different from your policy limit, which is the maximum the insurer will pay. Deductible = your share first; limit = insurer's ceiling.

On the exam

Remember the inverse relationship: higher deductible → lower premium. Know that deductibles reduce small claims and morale hazard, and be ready to do simple math—subtract the deductible from the covered loss to find the insurer's payment. Note that liability coverage often has no deductible, while property coverage usually does.