What is meant by the term deductible?

The term deductible refers to the specific amount that a policyholder must pay out-of-pocket for covered expenses before the insurance company begins to pay for claims. This concept is fundamental to how many insurance policies function, as it helps to share the cost of risk between the insurer and the insured. When a policy includes a deductible, the policyholder must cover this amount first, which can help to reduce the overall cost of premiums for the insurance policy.

For example, if a policy has a deductible of $500 and the insured has a claim for $2,000, the insurer will only pay the remaining $1,500 after the deductible has been met. This mechanism not only incentivizes policyholders to avoid making small claims but also reflects an agreement between the insurer and the insured about how costs will be managed in the event of a loss.

In contrast, other choices represent different concepts in insurance, such as coverage limits, fees, and premiums, which do not capture the specific definition of a deductible within an insurance policy framework.