What is a 'deductible' in an insurance policy?

A deductible in an insurance policy is the amount that the insured must pay out of pocket before the insurance coverage kicks in and the insurer starts to pay for the remaining costs of a claim. This requirement serves a couple of purposes: it encourages the insured to be mindful of their claims since they bear some initial expense, and it helps keep insurance premiums lower by mitigating the risk for the insurer.

Choosing this option correctly highlights the functioning of deductibles in the way they contribute to risk management both for the insurer and the insured. Essentially, the deductible is the threshold of expense that the policyholder agrees to cover when a loss occurs, ensuring that not every small claim is filed with the insurer.

Understanding the role of deductibles is crucial for managing insurance costs and making informed decisions about policy selection. It balances the amount of risk retained by the policyholder with the overall expenses associated with insurance coverage.