State Farm Auto Insurance Practice Test

What happens when a higher deductible is chosen by the customer?

1. The premium increases

2. The coverage becomes more extensive

3. The premium decreases

4. The policy becomes invalid

The correct answer is: The premium decreases

When a customer chooses a higher deductible, the premium associated with the insurance policy typically decreases. This occurs because a higher deductible means that the policyholder is agreeing to pay more out-of-pocket expenses before the insurance coverage kicks in for claims. As a result, the insurer perceives a lower risk, which can lead to a reduction in the premium cost. Offering a lower premium incentivizes policyholders to take on more financial responsibility in the event of a claim, ultimately benefiting both the insurer and the insured in terms of lower ongoing costs for coverage.