What does the term "deductible" refer to in insurance terms?

The term "deductible" in insurance refers to the specific amount that an insured person must pay out of pocket before their insurance coverage will start to pay for a claim. This means that when an incident occurs that leads to a claim, the insured must cover expenses up to the deductible amount, after which the insurance company will assume responsibility for the remaining costs up to the policy limits.

This mechanism helps to lower the overall premium cost because it decreases the insurer's financial risk. The higher the deductible chosen by the policyholder, the lower the premium usually is, as the policyholder is agreeing to bear more of the initial costs in the event of a claim.

In contrast, the other options refer to different aspects of an insurance policy. The total coverage amount is the maximum limit an insurer will pay for a covered loss. The annual premium cost is the amount paid by the policyholder to maintain the insurance policy. The limit of liability covered by the policy refers to the maximum amount the insurer will pay towards claims arising from liability incidents. All these concepts are important in understanding an insurance policy, but they do not define the term "deductible."