Canadian Accredited Insurance Broker (CAIB) One Practice Exam

What is a deductible in an insurance policy?

1. The total coverage amount of the policy

2. The amount the insured must pay before the insurer covers the loss

3. The penalty for late payment of premiums

4. A provision for premium refunds

The correct answer is: The amount the insured must pay before the insurer covers the loss

A deductible in an insurance policy is defined as the amount the insured must pay out of pocket before the insurance coverage kicks in to cover the remaining costs of a claim. This mechanism is integral to insurance policies as it helps to share the risk and costs between the insurer and the insured. When a loss occurs, the deductible is subtracted from the total amount of the claim, so the insurer only pays the amount over and above this deductible threshold. As a result, the insured is encouraged to take care in managing their risks, as they will have to bear a portion of any financial loss. The other options do not accurately describe a deductible. The total coverage amount of the policy refers to the maximum that the insurer will pay for a covered loss, but this does not take into account the insured's contribution through a deductible. A penalty for late payment of premiums is a separate issue that pertains to maintaining policy coverage, rather than the mechanics of how claims are processed. Lastly, a provision for premium refunds relates to how policy costs may be adjusted or returned under certain conditions, which is also distinct from the definition of a deductible.