What does the term "deductible" mean in insurance?

The term "deductible" in insurance refers to the specific amount that the insured individual must pay out-of-pocket before the insurance coverage takes effect for a claim. This is an essential component of many insurance policies, as it establishes the threshold that must be met before the insurer contributes to the costs associated with a claim.

For example, if a policy has a deductible of $1,000, the policyholder will need to pay the first $1,000 of any claim before the insurance company will begin to cover the remaining costs. The purpose of a deductible is to encourage responsible behavior from policyholders by sharing in the risk of loss and to prevent minor claims from overloading the insurance system.

The other options do not accurately describe what a deductible is. The total amount the insurer will pay for claims relates to policy limits rather than the deductible. The annual fee for maintaining an insurance policy pertains to premiums, which are distinct from deductibles. Finally, a penalty for late premium payments is not related to deductibles but rather concerns the maintenance of policy status and payment obligations.