Washington State Insurance Practice Exam

In insurance terminology, what does "deductible" refer to?

1. The amount an insurer will never pay

2. The amount an insured must pay out of pocket before coverage kicks in

3. The percentage of claims an insurer covers

4. The total premium amount paid annually

The correct answer is: The amount an insured must pay out of pocket before coverage kicks in

In insurance terminology, the term "deductible" refers specifically to the amount an insured party is required to pay out of pocket before the insurance coverage begins to pay for benefits. This concept is essential in understanding how insurance policies work, as it establishes a threshold that must be met by the policyholder before the insurer will contribute towards any claims. Deductibles are designed to reduce the overall costs for insurance providers by encouraging policyholders to take on some financial responsibility when a loss occurs. For example, if a policy has a deductible of $500, the insured will need to personally pay the first $500 in covered expenses, after which the insurance company would cover the remaining costs according to the terms of the policy. This principle helps to manage risk and ensures that insured individuals are engaged in their own risk management. Understanding the deductible aids policyholders in making informed decisions about their insurance coverage and what level of financial responsibility they are willing to accept.