Other Than Life (OTL) Practice Exam

What is a deductible in insurance terms?

1. The amount an insurer pays for a claim

2. The premium you pay monthly

3. The upfront cost you must pay before insurance kicks in

4. The total value of insured items

The correct answer is: The upfront cost you must pay before insurance kicks in

A deductible in insurance terms refers to the upfront cost you must pay before your insurance coverage begins to pay for a claim. It acts as a threshold that the policyholder must reach when filing a claim, meaning that if the cost of the claim is less than the deductible amount, the insurer will not provide any payment. The purpose of a deductible is to share the risk between the insurer and the insured, discouraging frivolous claims and encouraging policyholders to be more responsible regarding their insured items. In contrast, the other terms explained in the incorrect options do not accurately represent what a deductible is. The amount an insurer pays for a claim is determined after the deductible has been applied, making it a separate concept. The premium refers to the regular payment made by policyholders to maintain their insurance coverage, which does not directly relate to the deductible. Lastly, the total value of insured items is about the worth of the insured property, which is entirely different from the concept of a deductible.