What is the effect of a deductible on an insurance payout for a claim?

A deductible is the amount that the policyholder must pay out of pocket before the insurance coverage kicks in and the insurer pays for a covered claim. When a deductible is applied to an insurance payout, it effectively decreases the amount that the insurer will pay for the claim. For example, if a policy has a deductible of $1,000 and the total amount of damage is $5,000, the insurer would only payout $4,000 after the deductible is met.

This mechanism serves two purposes: it reduces the insurer's exposure by ensuring that the policyholder takes on some of the financial responsibility for smaller claims and it can also help lower the overall premium costs for the insurance policy. By having a deductible, policyholders can often choose a higher deductible to reduce their premiums, but this means they will have to bear more of the costs themselves in the event of a claim.