What does the term 'deductible' mean in insurance?

The term 'deductible' refers to the portion of a loss that is paid by the insured before the insurance company covers the remaining amount. This means that when a claim is made, the insured must pay a specified amount out of their own pocket first, and only then does the insurer reimburse or cover the remaining costs associated with the claim. This mechanism is designed to share the risk between the insurer and the insured, encouraging policyholders to take care to avoid unnecessary claims, as they are financially responsible for the deductible amount.

Understanding deductibles also highlights their role in the insurance process; they can influence premiums, as policies with higher deductibles often have lower premium costs. In contrast, the other options do not accurately represent the concept of a deductible. For instance, the insurer’s payment before a claim is settled does not capture the true essence of what a deductible encompasses, and neither does referencing the total coverage amount or the premium charged by the insurer. These aspects are separate components of an insurance policy but do not define what a deductible is.