Which of the following best describes the meaning of a deductible in an insurance policy?

A deductible is defined as the out-of-pocket expense that a policyholder must pay before their insurance coverage begins to pay for a claim. This means that policyholders must cover this specified amount themselves in the event of a loss. For example, if a policy has a deductible of $500 and there is a claim for $1,500, the policyholder would first pay $500, and then the insurance company would cover the remaining $1,000.

This mechanism primarily serves to reduce the frequency of small claims, as policyholders are incentivized to absorb some of the costs. Additionally, it often helps lower the insurance premium since the policyholder assumes some financial risk.

Other options describe different aspects of insurance policies. The first choice refers to the insurer's payment responsibilities, which are influenced by the deductible but do not define it. The third option pertains to coverage limits and does not relate to out-of-pocket expenses. The last option relates to administrative fees, which are not relevant when discussing deductibles.