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Disability Income

Definitions of disability, elimination and benefit periods, presumptive, recurrent, residual, and partial benefits, riders, taxation, and business disability coverage.

Study questions and answers

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1. Which definition of total disability is most favorable to the insured?

  1. Own occupation
  2. Any occupation
  3. Social Security definition
  4. Any gainful work
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A. Own occupation
Own occupation pays if the insured cannot perform their own job, even if they could do other work.

2. In a disability income policy, the elimination period is:

  1. The maximum length of time benefits will be paid
  2. A waiting period before new coverage takes effect
  3. The time from the start of a disability until benefits begin
  4. The time allowed to file proof of loss
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C. The time from the start of a disability until benefits begin
The elimination period works like a time deductible. A probationary period is a different waiting period that applies to new policies.

3. Choosing a longer elimination period on a disability income policy will generally result in:

  1. A lower premium
  2. A higher premium
  3. A longer benefit period
  4. No change in premium
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A. A lower premium
The longer the insured covers the loss themselves, the lower the premium.

4. Under a presumptive disability provision:

  1. Benefits are paid for a partial disability
  2. Loss of sight, hearing, speech, or the use of two limbs is presumed to be total disability, even if the insured can work
  3. A new elimination period applies to each claim
  4. Benefits are based on lost income
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B. Loss of sight, hearing, speech, or the use of two limbs is presumed to be total disability, even if the insured can work
With a presumptive loss, full benefits are paid regardless of the insured's ability to work.

5. Under a recurrent disability provision, a disability from the same cause that recurs within a specified period (often six months) is:

  1. Treated as a continuation of the prior claim, with no new elimination period
  2. Treated as a new claim with a new elimination period
  3. Excluded from coverage
  4. Paid as a partial disability
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A. Treated as a continuation of the prior claim, with no new elimination period
The insured does not have to satisfy a second elimination period.

6. A residual disability benefit:

  1. Pays only for total disability
  2. Pays a lump sum for the loss of a limb
  3. Pays only after Social Security begins
  4. Pays a proportional benefit based on lost income when the insured returns to work at reduced earnings
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D. Pays a proportional benefit based on lost income when the insured returns to work at reduced earnings
Residual benefits replace part of the lost income instead of requiring total disability.

7. Benefits from an individually purchased disability income policy, paid for with after-tax dollars, are:

  1. Tax free
  2. Taxable as ordinary income
  3. Half taxable
  4. Taxed as capital gains
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A. Tax free
When the insured pays the premiums with after-tax dollars, benefits are tax free. Benefits from employer-paid, deducted premiums are taxable to the employee.

8. Business overhead expense insurance:

  1. Replaces the owner's personal salary
  2. Funds a buyout of a disabled owner
  3. Covers business expenses such as rent and utilities during the owner's disability, with deductible premiums and taxable benefits
  4. Pays a death benefit to the business
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C. Covers business expenses such as rent and utilities during the owner's disability, with deductible premiums and taxable benefits
BOE keeps the business running while the owner is disabled. A disability buy-sell policy funds a buyout.

9. How long is the waiting period before Social Security disability benefits begin?

  1. 3 months
  2. 5 months
  3. 6 months
  4. 12 months
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B. 5 months
Social Security disability uses a strict definition of disability and has a five-month waiting period.

10. Waiver of premium in a disability income policy typically begins after the insured has been totally disabled for:

  1. 6 months
  2. 30 days
  3. 90 days
  4. 1 year
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C. 90 days
Once the waiting period is met, premiums are often waived retroactively to the start of the disability.

11. A partial disability benefit is commonly paid at:

  1. 100% of the total disability benefit
  2. 25% of the insured's former salary
  3. The full benefit for life
  4. 50% of the total disability benefit, for a limited time
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D. 50% of the total disability benefit, for a limited time
Partial disability means the insured can perform some, but not all, of their job duties.

12. In a disability income policy, the benefit period is:

  1. The period during which premiums are waived
  2. The maximum length of time benefits will be paid for a disability
  3. The time allowed to file a claim
  4. The waiting period before benefits begin
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B. The maximum length of time benefits will be paid for a disability
Benefit periods can range from a few years to age 65 or longer.

13. Group long-term disability benefits are commonly reduced by:

  1. Benefits received from Social Security and workers' compensation
  2. Life insurance proceeds
  3. Health insurance claims paid
  4. Retirement plan contributions
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A. Benefits received from Social Security and workers' compensation
Coordination prevents the insured from receiving more than their prior income.

14. A cost of living adjustment rider on a disability income policy:

  1. Pays a lump sum at retirement
  2. Lowers premiums during inflation
  3. Increases benefits during a disability based on inflation
  4. Increases the elimination period
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C. Increases benefits during a disability based on inflation
COLA riders protect the buying power of long-term benefits.

15. A future increase option rider allows the insured to:

  1. Buy additional disability coverage at set times without proving insurability
  2. Convert to a long-term care policy
  3. Shorten the elimination period
  4. Increase benefits automatically each year
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A. Buy additional disability coverage at set times without proving insurability
Proof of income is still required to justify the higher benefit.

16. A social insurance supplement rider pays benefits when:

  1. The insured's employer goes bankrupt
  2. The insured is disabled but is denied Social Security disability benefits
  3. Social Security benefits increase
  4. The insured retires
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B. The insured is disabled but is denied Social Security disability benefits
It fills the gap created by Social Security's strict definition of disability.

17. Disability buy-sell policies typically have:

  1. Monthly benefits for life
  2. Benefits paid to the disabled owner's family
  3. Long elimination periods and may pay a lump-sum benefit
  4. No elimination period
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C. Long elimination periods and may pay a lump-sum benefit
Long elimination periods, often one to two years, confirm the disability is long term before the buyout.

18. In a key person disability policy, the premiums are:

  1. Deductible, and the benefits are tax free
  2. Paid by the key employee
  3. Deductible, and the benefits are taxable
  4. Not deductible, and the benefits received by the business are tax free
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D. Not deductible, and the benefits received by the business are tax free
The business owns the policy and receives the benefits.

19. Which definition of accident is more favorable to the insured?

  1. Neither definition applies to disability policies
  2. Both definitions are equally favorable
  3. Accidental bodily injury (results), where only the result must be unexpected
  4. Accidental means, where the cause must be unexpected
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C. Accidental bodily injury (results), where only the result must be unexpected
Accidental means is more restrictive because the cause itself has to be accidental.

20. A probationary period in a health policy:

  1. Excludes sicknesses that begin during a specified period after the policy is issued
  2. Is the waiting period after a disability begins
  3. Applies to accidents only
  4. Is the time allowed to return the policy
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A. Excludes sicknesses that begin during a specified period after the policy is issued
Probationary periods apply only to sickness, not accidents.
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