What is a deductible in an insurance policy?

A deductible in an insurance policy represents the initial amount owed by the insured before the insurance coverage begins to pay for a claim. When a policyholder experiences a loss, they are required to pay this specified amount out-of-pocket first. The insurance provider then pays the remaining covered expenses, up to the policy limits.

This mechanism serves several purposes. It encourages policyholders to be more cautious and reduce the frequency of small claims, as they will bear the initial costs. Additionally, deductibles can lead to lower premiums since the insurer's financial risk is reduced when the insured shares in the cost of losses.

The other options do not accurately define a deductible. The total sum insured pertains to the maximum amount the insurer will pay in the event of a loss, while the final payout after claims settlement refers to the amount the insured receives after all calculations and deductions are made. Lastly, the rate of premium charged relates to the cost of purchasing the insurance policy itself, rather than establishing the deductible amount.