Why is an object called an instance of a class?

A class is only a blueprint — it defines what data and methods objects of that type will have, but occupies no memory for data. An object is an actual realisation of that blueprint: memory is allocated for it and it holds its own values for the instance variables. Since each object is one particular case created from the general description, it is called an instance of the class.

The answer must contain the blueprint idea and the point that each object holds its OWN copy of the data. The analogy that works well: a house plan is the class; each house built from it is an object, and although they share the design, each has its own address and its own paint. That is why the variables belonging to objects are called instance variables.