What is the significance of an insurance policy's "deductible"?

The significance of an insurance policy's "deductible" lies in its role in determining how costs are shared between the insured and the insurer. The deductible is the specific amount that the insured must pay out-of-pocket for a covered loss before the insurance company steps in to cover the remaining costs. This concept serves several important purposes.

First, it encourages policyholders to be more cautious and minimize small or frivolous claims since they know they will need to pay the deductible before receiving benefits. This can help keep overall insurance premiums lower for all policyholders.

Second, the deductible helps to establish a limit on the insurance company's liability for minor losses and promotes greater financial responsibility on the part of the insured. By understanding that they are responsible for a portion of the costs, policyholders may be more likely to seek out insurance only for significant losses rather than using it for every minor issue.

Thus, the correct choice highlights the practical application of the deductible in insurance policies and illustrates a key principle of how insurance functions in sharing risk.