Texas All Lines Adjuster Practice Test

What is a deductible in the context of insurance?

1. The amount the insurer pays in a claim

2. The amount the policyholder must pay out-of-pocket before the insurer pays

3. The total value of the insurance policy

4. A term describing the overall limit of coverage

The correct answer is: The amount the policyholder must pay out-of-pocket before the insurer pays

A deductible is the amount that a policyholder must pay from their own pocket before the insurance company begins to pay for covered losses. This is an important aspect of insurance policies, as it helps to share the risk between the insurer and the insured. By requiring a deductible, insurance companies can reduce the frequency of small claims and encourage policyholders to be more careful, as they will have a financial stake in each claim. For example, if a policyholder has a $1,000 deductible and they incur a loss of $3,000, they will pay the first $1,000, and the insurer will cover the remaining $2,000. This system helps to lower insurance premiums, as higher deductibles generally equate to lower monthly or annual costs for coverage. Understanding this concept is crucial for navigating insurance claims and managing personal finances effectively.