PSI Ohio Insurance Practice Exam

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

1. To increase the policy limit

2. To reduce the upfront premium costs

3. To manage claims costs by requiring payment before coverage kicks in

4. To enforce higher premiums on higher-risk individuals

The correct answer is: To manage claims costs by requiring payment before coverage kicks in

The purpose of a deductible in an insurance policy is to manage claims costs by requiring payment before coverage kicks in. When an insured party makes a claim, they must first pay a certain amount out of pocket, known as the deductible. This mechanism serves several purposes. Firstly, it encourages policyholders to take measures to avoid losses since they share in the financial responsibility when a claim occurs. For example, if a person has a high deductible, they may be more inclined to take good care of their property to prevent incidents that could lead to claims. Secondly, deductibles help to reduce the number of small claims that insurance companies have to process. By requiring policyholders to pay a part of the claim themselves, insurance companies can limit their exposure to minor incidents, which often can be managed without involving the insurer. This ultimately can help keep insurance premiums lower for everyone, as the overall costs of small claims are reduced. In summary, the deductible is a key component of insurance policies that helps to manage costs, promote responsible behavior among policyholders, and minimize minor claims.