What are the three common types of deductibles?

The correct answer identifies three common types of deductibles used in insurance policies: percentage, fixed, and franchise.

Percentage deductibles are typically calculated as a percentage of the total coverage amount, meaning that the amount the policyholder pays out-of-pocket depends on the total value of the claim. This type of deductible is particularly common in certain types of insurance, such as property insurance, where the risk might be higher due to a total loss situation.

Fixed deductibles involve a specific dollar amount that the policyholder must pay before the insurance coverage kicks in. This type of deductible provides a clear understanding of what the out-of-pocket cost will be in the event of a claim, making it straightforward for policyholders to comprehend their financial responsibilities.

Franchise deductibles are a bit different, as they operate on a threshold basis. If the claim amount exceeds a certain limit, the insurer covers the entire amount above the deductible threshold, thus not requiring the policyholder to pay a percentage or a fixed amount. This type is often seen in large general casualty and property insurance policies.

Recognizing these three types of deductibles is crucial for understanding how insurance policies can be structured and how they affect the policyholder's financial exposure in the event of a loss.