Final answer:
The statement that an insurance premium of $4,800 is deductible under the 12-month rule is true, aligning with IRS guidelines for periods not extending beyond the subsequent tax year. Insurance companies collect premiums from policyholders to cover anticipated expenses like accidents, employing deductibles, co-payments, and coinsurance to share risks.The right answer is True
Step-by-step explanation:
The statement that the entire insurance premium of $4,800 is deductible under the 12-month rule because the insurance coverage does not exceed 12 months and does not extend beyond the end of the next year is true. This is in line with IRS guidelines which state that prepaid expenses such as insurance premiums that cover a period of less than 12 months and do not go beyond the end of the tax year following the year in which the payment is made, may be deductible in the year they are paid.
For businesses, including insurance companies, collecting premiums is a standard practice to offset risks. If each of the 100 drivers pays an annual insurance premium of $1,860, the company collects a total of $186,000. This pooled amount is then used to cover the cost of claims, such as accidents that these drivers might experience throughout the year.
Insurance plans often include deductibles, co-payments, and coinsurance. A deductible is an amount the policyholder must pay before the insurance starts paying. Co-payments are fixed amounts paid for specific services, whereas coinsurance is a percentage of the costs that the policyholder shares with the insurer. These measures help to balance the financial risk between the insured and the insurer, reducing moral hazard by ensuring that policyholders have a stake in the cost of the services they receive.