Washington Life Producer Practice Exam

How is 'deductible' best defined in an insurance context?

1. The amount an insured must pay out of pocket before coverage begins

2. The total coverage limit provided by the insurer

3. The periodic payment made to keep a policy active

4. The percentage of a claim paid by the insured

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

In an insurance context, the term 'deductible' is best defined as the amount an insured must pay out of pocket before the insurance coverage takes effect. This concept is a crucial part of many insurance policies, including health, auto, and homeowner’s insurance. The deductible is the initial expense that the insured is responsible for when they file a claim. For instance, if a policy has a deductible of $500, the insured must pay the first $500 of any covered loss, and the insurance company will then cover the remaining costs. This mechanism serves several purposes. It helps to reduce the number of small claims processed by insurers, which can in turn lower overall premiums. It also encourages insured individuals to take a more active role in managing their claims and making cost-effective decisions regarding their care or repairs, as they will directly bear the cost up to the deductible amount. The other options do not accurately define what a deductible is; rather, they refer to other insurance terms like coverage limits, premium payments, and coinsurance percentages, which are distinct concepts within the realm of insurance.