South Dakota Crop Insurance Practice Exam

What is the purpose of having deductibles in insurance?

1. To eliminate risk entirely

2. To reduce the insurance premiums

3. To increase available coverage options

4. To create a guaranteed payout

The correct answer is: To reduce the insurance premiums

The purpose of having deductibles in insurance is primarily to reduce the insurance premiums. A deductible is the amount that the policyholder must pay out-of-pocket before the insurance company begins to cover the remaining costs of a claim. When a policy has a higher deductible, the insurer takes on less risk, which often leads to lower premiums because the policyholder is agreeing to bear a larger portion of the loss. Insurers benefit from deductibles because they encourage policyholders to be more cautious and minimize small claims, which can help lower administrative costs and overall losses. Consequently, this risk-sharing mechanism can make insurance more affordable for those who have confidence in their ability to cover minor losses themselves. While the other choices touch upon aspects of insurance, they do not accurately reflect the primary function of deductibles. Eliminating risk entirely is not feasible with insurance, as it is a tool to help manage risk rather than eliminate it. Offering more coverage options can be a secondary effect of having a structured policy but is not the main purpose of a deductible. The idea of a guaranteed payout is contrary to how deductibles operate, as they actually mean the insured must absorb some loss before receiving payments from the insurer.