What is a Deductible in insurance?

A deductible in insurance refers to the fixed amount that the insured must pay out of pocket for a covered loss before the insurance company starts to pay its share. This amount is predetermined when the policy is created and is designed to share the risk between the insurer and the insured.

For example, if someone has a deductible of $1,000 and incurs a covered loss of $5,000, they would pay the first $1,000, and the insurance company would then cover the remaining $4,000. The purpose of a deductible is to discourage minor claims and to encourage policyholders to be more responsible with their insured property, as they will be financially involved in the loss.

The other options do not accurately describe what a deductible is. The total amount the insurer pays for covered losses pertains to the claims payment process, while the cost of insurance refers to the premium owed to the insurer. Lastly, a penalty for late payment of the insurance premium relates to payment expectations rather than the concept of deductibles.