In what situation does a stop-loss provision become effective?

A stop-loss provision is a feature in insurance policies that is designed to protect the insured from high costs. It effectively limits the amount of out-of-pocket expenses a policyholder must pay for healthcare services during a specified period, typically a year. Once the total out-of-pocket expenses exceed a pre-set limit defined in the insurance policy, the stop-loss provision activates, and the insurance company covers any additional costs incurred by the insured.

This mechanism is particularly relevant in health insurance plans, where individuals might face substantial medical bills. By having a stop-loss provision, insured parties can feel more secure knowing there is a limit to their financial responsibility, which helps with budgeting and ensures that no one faces catastrophic healthcare expenses without support.

In contrast, the other options do not relate to the specific conditions under which a stop-loss provision is triggered. Canceling a policy or applying for additional coverage does not engage the stop-loss feature, nor does the assessment of risk by the insurer activate it. Thus, the situation where out-of-pocket expenses exceed a pre-set limit is indeed the correct context for when a stop-loss provision becomes effective.