South Carolina Personal Lines Practice Exam

Which statement is true regarding the concept of 'deductibles' in insurance policies?

1. They are the total coverage limits

2. They reduce the insurance company's liability

3. They guarantee full claim payment

4. They are tax-deductible expenses

The correct answer is: They reduce the insurance company's liability

The statement regarding deductibles that is true is that they reduce the insurance company's liability. A deductible is the amount of money that the insured must pay out of pocket before an insurance company will pay a claim. By incorporating a deductible into the policy, the insurer limits its financial exposure by ensuring that the policyholder is responsible for a portion of the loss. This not only reduces the insurer's liability on individual claims but also often results in lower premium costs for the insured, as a higher deductible typically corresponds with a lower premium. The concept directly ties into the relationship between the insured and the insurer, as it sets a clear boundary on how much the insurer is obligated to pay and encourages policyholders to manage their claims responsibly.