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 a $6,500 covered roof loss under a policy with a $1,000 deductible: the insurer pays $5,500. If the damage were smaller than the deductible, the insurer would pay nothing.

Other forms of deductible you will see: percentage deductibles figured on the insured value (the ISO homeowners earthquake endorsement HO 04 54 applies a percentage separately to Coverages A, B and C); the ISO homeowners rule that when two deductibles apply to one loss, only the highest applies; and, in the commercial coinsurance formula, the deductible comes off after the coinsurance ratio is applied.

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. Liability policies usually have no deductible; when one is added (for example ISO CG 03 00), the insurer pays the claim and the insured reimburses the deductible. A self-insured retention differs: the insured pays losses within it before the policy responds.