Washington State Insurance Practice Exam

What is a "deductible"?

1. The total premium paid over a year

2. The amount the insured pays before coverage kicks in

3. The maximum limit of an insurance policy

4. The fee for policy reinstatement

The correct answer is: The amount the insured pays before coverage kicks in

A deductible refers to the amount that the insured is required to pay out of pocket for a covered loss before the insurance company will start to pay for the remaining costs associated with that claim. This concept is critical in insurance as it helps determine the financial responsibility of the policyholder at the onset of filing a claim. By requiring the insured to cover a portion of the loss, deductibles serve to discourage minor claims and reduce administrative costs for insurers. In this context, the other choices do not capture the essential definition of a deductible. The total premium paid over a year is related to the cost of maintaining an insurance policy, but it does not address the concept of cost-sharing for claims. The maximum limit of an insurance policy pertains to the cap on benefits payable by the insurer but does not reflect the out-of-pocket expenses incurred by the insured prior to coverage being activated. Lastly, the fee for policy reinstatement involves the process of reactivating a lapsed insurance policy and is unrelated to the claim process and the costs borne by the insured. Understanding the specific role of a deductible is vital for effective financial planning and utilizing insurance coverage appropriately.