What is a deductible in an insurance policy?

A deductible in an insurance policy refers to the amount the insured must pay out-of-pocket for a covered loss before the insurance provider starts to pay for the remaining eligible expenses. This mechanism is designed to share the risk between the insurer and the policyholder, encouraging the latter to be more cautious and responsible while making claims.

When a policy includes a deductible, the insured is aware that claims will only be considered after they meet the deductible threshold. For instance, if a policy has a $500 deductible and the total damages amount to $2,000, the insured would pay the first $500, and the insurer would cover the remaining $1,500. This setup helps keep insurance premiums lower, as it encourages policyholders to avoid small claims and reduces administrative costs for the insurer.

In contrast, the other options address different aspects of insurance policies: the maximum payout by the insurer, the premium costs, and limitations on coverage, but none of these describes the function of a deductible as clearly and completely as the correct answer does.