Property and Casualty Insurance Practice Exam

What is a deductible in the context of insurance?

1. The amount paid by the insurance company for each covered loss

2. The dollar amount the insured must pay on each loss before coverage applies

3. The total coverage limit of an insurance policy

4. The amount retained by the insurer after a claim is settled

The correct answer is: The dollar amount the insured must pay on each loss before coverage applies

A deductible in the context of insurance refers to the specific dollar amount that the insured must pay out of pocket for each loss before any coverage provided by the insurance policy kicks in. This means that if an insured party experiences a loss, they will first need to cover expenses up to that deductible amount. For example, if someone has a $1,000 deductible and experiences $5,000 in damage, they would need to pay the first $1,000, and the insurance company would then cover the remaining $4,000. The purpose of a deductible is to share the risk between the insured and the insurer. By requiring the policyholder to pay a portion of the loss, insurers can help keep premiums more affordable and discourage small claims. The other choices describe different aspects of insurance but do not accurately define a deductible. A describes the insurer's contribution to a claim, C mentions the overall limit of coverage rather than the personal cost to the insured, and D speaks of the insurer's retained amount post-settlement, which does not relate to the deductible concept.