State Farm Fire Independent Policy Practice Exam

What is the impact of a high deductible on an insurance premium in an HO-3 policy?

1. It generally increases the premium

2. It generally decreases the premium

3. It has no impact on the premium

4. It doubles the coverage limit

The correct answer is: It generally decreases the premium

A high deductible on an insurance policy such as the HO-3 typically leads to a decrease in the premium. When a policyholder opts for a higher deductible, they are agreeing to pay more out-of-pocket for claims before the insurance coverage kicks in. This shift in risk typically results in lower premiums because the insurer takes on less financial risk. Since policyholders with higher deductibles are less likely to submit small claims, insurers can reduce rates accordingly. In contrast, lower deductibles may lead to higher premiums, as the insurer bears more risk and is more likely to pay out on claims. This relationship encourages many insured individuals to opt for higher deductibles in exchange for more affordable premiums while still maintaining adequate coverage.