State Farm Insurance License Practice Exam

What is the purpose of a deductible in an insurance policy?

1. The portion the insurer pays after a claim

2. The amount paid out before coverage applies

3. The total annual premium paid

4. The maximum limit of coverage

The correct answer is: The amount paid out before coverage applies

The purpose of a deductible in an insurance policy is to represent the amount that the policyholder must pay out-of-pocket before the insurance coverage begins to pay for a covered loss. This mechanism is designed to reduce the number of small claims made by the insured, promoting responsible claim behavior and allowing insurers to keep premiums more affordable. When a claim is filed, the deductible is subtracted from the total amount of the claim. For example, if the insured incurs a loss of $5,000 and has a deductible of $1,000, the insurer would pay $4,000, after the deductible is satisfied. This structure also encourages policyholders to be more mindful of their coverage and expenses, as they will need to cover the deductible amount directly. The other options do not accurately describe the role of a deductible; they refer to different aspects of an insurance policy. For instance, the insurer's payment after a claim pertains to the benefit or coverage provided, while the total annual premium is what the policyholder pays for the insurance coverage itself. The maximum limit of coverage refers to the highest amount that an insurer will pay on a covered claim, which is unrelated to the deductible mechanism.