South Carolina Personal Lines Practice Exam

What is a deductible in an insurance policy?

1. A set fee for policy cancellation

2. A specified dollar amount the insured pays before benefits

3. An optional coverage amount

4. The total value of the policy

The correct answer is: A specified dollar amount the insured pays before benefits

A deductible in an insurance policy refers to the specified dollar amount that the insured must pay out of pocket before the insurance company begins to pay for covered expenses. This mechanism is designed to encourage policyholders to share in the costs of their claims and to reduce the number of small claims filed, which can keep premiums lower for everyone. When a deductible is in place, it means that for any covered loss or claim, the insured will first need to incur expenses up to that predetermined amount. For instance, if a homeowner has a deductible of $1,000 and incurs $5,000 in damage, the insurance company will only pay for the remaining $4,000 after the homeowner has paid their $1,000 deductible. This directly contrasts with other options provided in the question. A set fee for policy cancellation, optional coverage amounts, and the total value of the policy do not pertain to the deductible's function within the context of insurance. The glossary of terms in insurance defines a deductible specifically in the context of out-of-pocket expenses tied to claims, which solidifies why the specified dollar amount the insured pays before benefits is the correct choice.