Future Business Leaders of America (FBLA) Personal Finance Practice Test

In insurance terms, what is a deductible?

1. The total cost of insurance premiums

2. The set amount the policyholder must pay per loss

3. The maximum benefit amount covered by the policy

4. The duration of the insurance coverage

The correct answer is: The set amount the policyholder must pay per loss

A deductible is a specific amount that the policyholder must pay out-of-pocket towards an insured loss before the insurance coverage kicks in. This means that if an individual makes a claim, they will need to pay the deductible amount first, and then the insurance provider will cover the remaining costs, up to the policy limits. Choosing a higher deductible can often result in lower premium costs, as the policyholder is assuming more risk. Conversely, a lower deductible can lead to higher premium costs, since the insurer is taking on more risk. Understanding the concept of a deductible is crucial for policyholders when selecting an insurance policy, as it affects both their out-of-pocket costs during a claim and their overall insurance premium expenses.