What is a deductible in an insurance policy?

A deductible is defined as the amount that the insured is required to pay out-of-pocket for a covered loss before the insurance company begins to pay for the remaining costs. This means that if an insured experiences a loss and files a claim, they must first cover this specified amount themselves, and the insurance coverage will only start to apply once that deductible has been met.

For instance, if an insured has a policy with a deductible of $1,000 and incurs a loss of $5,000, the insured would be responsible for paying the initial $1,000, and the insurance provider would then cover the remaining $4,000 of the claim. This structure helps to mitigate the number of minor claims made to insurers, as it encourages policyholders to take on some financial responsibility for smaller losses.

The other options refer to different aspects of an insurance policy. The total policy limit relates to the maximum amount the insurer will pay for a covered loss, the additional cost for higher limits relates to endorsements or riders that increase coverage, and the premium is the amount that the insured pays periodically to keep the policy active. Each of these serves a specific function within the insurance framework but does not define what a deductible is.