State Farm Auto Insurance Practice Test

Which of the following terms indicates the amount a customer agrees to pay if a covered loss occurs?

1. Premium

2. Deductible

3. Limit

4. Endorsement

The correct answer is: Deductible

The term that indicates the amount a customer agrees to pay if a covered loss occurs is the deductible. This is the specific dollar amount that an insured individual must pay out of pocket before their insurance coverage kicks in to cover the remaining cost of a loss. The purpose of a deductible is to share the risk between the insurer and the insured, encouraging the insured to manage smaller claims while the insurance company assumes responsibility for larger losses. For example, if a policy has a $500 deductible and a claim amounts to $2,000, the insured would first pay the $500 deductible, and then the insurance policy would cover the remaining $1,500. This mechanism is a fundamental part of many insurance policies, shaping how customers approach their coverage and manage claims. In contrast, the premium is the amount paid for the insurance policy itself, limits refer to the maximum amount an insurer will pay for a covered loss, and endorsements are modifications or additions to the standard insurance policy. Each of these terms plays a different role within an insurance policy but does not directly represent the out-of-pocket cost that the insured agrees to pay in the event of a claim.