In insurance policy terms, a deductible is the amount of money which the insured party must pay before the insurance company's own coverage plan begins. In practical terms, insurance companies include a deductible in their policies to avoid paying out benefits on relatively small claims. A typical auto insurance policy, for example, may carry a $500 deductible. If the owner of that car accidentally hits another car while parking and both drivers agree the damage is minimal, he or she would pay the $500 repair bill out of his or her own pocket. Insurance companies would not encourage a claim for such minor damages.

However, this payment of $500 means that the next accident claim would be covered by the insurance company. The car owner is said to have 'met the deductible' and is now eligible for complete protection. The same holds true for medical insurance. Patients who visit the emergency room for a minor injury or procedure would have to pay out of pocket until they have reached the level of the deductible. If their medical expenses on a visit to the hospital would exceed the deductible, then the insurance company would pay the total charges minus the deductible. In either scenario, the policy holder is almost always held responsible for a small portion of their claims.

The amount of a deductible is usually inversely related to the amount of the premiums (regular payments) charged by the insurers. That is, lower deductibles are usually associated with higher premiums, and vice versa. There are pluses and minuses to both configurations — one expensive accident or medical procedure could bring on a very high deductible payment, or a lifetime of good health and few automotive claims could make higher premiums a relative waste of money. Then again, having total coverage with little to no deductible can be a very comforting thought during a crisis, or not paying too much for unneeded coverage can help keep household finances manageable.

A deductible of some kind should be expected with any medical or automotive insurance policy. When shopping for affordable coverage, be sure to ask specific questions about the deductible and other obligations left to the policy holder. An exceptionally low premium rate may signal an equally exceptional high deductible amount. Try to find a balance between affordable premiums and a fair deductible when buying insurance.