Multiple Choice
Expenses that are owed by the seller, but will later be paid by the buyer, are considered:
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9. Current Liabilities
Types of Liabilities
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Which of the following best describes the difference between a premium and a deductible in the context of liabilities?
A
A premium is the maximum amount an insurer will pay for a claim, while a deductible is the minimum amount the insurer will pay.
B
A premium is the amount paid by the insurer to the insured after a loss, while a deductible is the total liability owed by the company.
C
A premium is a type of long-term liability, while a deductible is a current liability.
D
A premium is a payment made to obtain insurance coverage, while a deductible is the amount the insured must pay out-of-pocket before the insurer pays a claim.
Verified step by step guidance1
Step 1: Understand the concept of a premium. A premium is the payment made by an individual or entity to an insurance company in exchange for insurance coverage. It is typically paid periodically (e.g., monthly, annually) and represents the cost of maintaining the insurance policy.
Step 2: Understand the concept of a deductible. A deductible is the amount the insured party must pay out-of-pocket before the insurance company begins to cover the costs of a claim. It is essentially a cost-sharing mechanism designed to reduce the insurer's liability for small claims.
Step 3: Compare the two terms. A premium is a proactive payment made to secure insurance coverage, while a deductible is a reactive payment made when a claim is filed and before the insurer contributes to the claim.
Step 4: Relate these concepts to liabilities. Premiums are not liabilities; they are expenses incurred to obtain insurance coverage. Deductibles, on the other hand, represent a financial obligation (liability) that the insured must fulfill before receiving insurance benefits.
Step 5: Confirm the correct answer. Based on the definitions and comparisons, the correct answer is: 'A premium is a payment made to obtain insurance coverage, while a deductible is the amount the insured must pay out-of-pocket before the insurer pays a claim.'
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