What is a deductible in an insurance policy?

A deductible in an insurance policy refers to the specific amount that the insured must pay out-of-pocket before the insurance coverage begins to pay for a claim. This amount is predetermined in the terms of the policy and is designed to minimize small claims and promote careful use of insurance. By having a deductible, insurance companies can reduce administrative costs and encourage policyholders to take some financial responsibility for losses, thereby discouraging minor claims.

For instance, if a policy has a deductible of $500 and the total cost of a covered loss is $2,000, the insured would need to pay the first $500, and then the insurance company would cover the remaining $1,500. This mechanism plays a critical role in insurance contracts, as it helps in risk management for both the insurer and the insured.

The other options do not accurately represent the function of a deductible. The total payment a claim generates, what the insurance pays per claim, or any percentage deducted from a claim payment represents different aspects of insurance policy claims management and payout but do not encapsulate the concept of a deductible.