C.20 Disability income insurance (individual and group)

Question 1

James Thompson, a 38-year-old software developer, recently attended a seminar on financial planning. Recognizing the need to secure his income in case of any unforeseen events, James is considering purchasing disability income insurance. He understands the importance of this coverage since he is the primary breadwinner for his family and his job requires him to be mentally and physically fit to work on complex projects. He is, however, uncertain about the primary purpose of disability income insurance.

Which of the following options should the financial planner explain to James as the primary purpose of disability income insurance?

A. To provide benefits to those who are temporarily disabled.
B. To provide benefits to those who are permanently disabled.
C. To provide benefits to those who are unable to work due to a disability.
D. To provide benefits to those who are retired.

Answer 1

C. To provide benefits to those who are unable to work due to a disability.

The primary purpose of disability income insurance is to replace a portion of the insured’s income if they become unable to work due to a disability, whether the disability is temporary or permanent. This insurance is designed to mitigate the financial impact of losing the ability to earn an income due to disability. It does not cover only temporary or only permanent disabilities, nor is it meant to provide benefits to those who are retired.

C.20 Disability income insurance (individual and group)

Question 2

Jonathan, a 38-year-old graphic designer, is reviewing his disability income insurance policy to understand the coverage better and prepare for any unexpected events that could impair his ability to work. He notices that the policy outlines specific conditions and situations that are not covered, which is causing him some concern. Jonathan’s policy has a monthly benefit of $3,000 and a waiting period of 90 days.

Given Jonathan’s situation, which of the following is most likely to be a common exclusion in Jonathan’s disability income insurance policy?

A. Hypertension
B. Carpal Tunnel Syndrome
C. Self-inflicted injuries
D. High cholesterol

Answer 2

C. Self-inflicted injuries

Disability income insurance policies commonly exclude coverage for self-inflicted injuries. Conditions like hypertension and high cholesterol are typically not excluded because they are common health issues that could lead to disability, but they are not usually the result of intentional actions by the insured. Carpal Tunnel Syndrome, particularly for a graphic designer, could be work-related and thus could be covered, depending on the specifics of the policy. Mental illness and pregnancy can be exclusions in some policies; however, this is less common and often depends on the individual policy details and the insurance provider. Self-inflicted injuries are a more standard exclusion as they are preventable and within the control of the insured.

C.20 Disability income insurance (individual and group)

Question 3

Katie Jensen is a 35-year-old graphic designer who is the primary breadwinner for her family. She has been exploring various insurance options to ensure financial stability in case she is unable to work due to an illness or injury. Katie understands the importance of having a safety net and is considering disability income insurance. As her financial planner, you need to explain to her the types of disability income insurance policies available.

Which of the following would you inform Katie are types of disability income insurance policies?

A. Short-term disability
B. Long-term disability
C. Own-occupation disability
D. All of the above

Answer 3

D. All of the above

Each option listed is a type of disability income insurance policy. Short-term disability policies provide coverage for a brief period, typically a few months to a year, and are often used to cover an individual until long-term disability or other benefits kick in. Long-term disability policies provide coverage for a more extended period, which can range from a few years to up until retirement age, depending on the policy terms. Own-occupation disability insurance is a type of long-term disability policy that provides benefits if you are unable to perform the duties of your specific occupation. Thus, Katie should be informed that all of these are viable types of disability income insurance policies that can be part of her financial planning.

C.20 Disability income insurance (individual and group)

Question 4

James is a 35-year-old software engineer who is considering purchasing a disability income insurance policy. He wants to ensure that in case of an unexpected illness or injury that leaves him unable to work, he will have a source of income to cover his living expenses. He is also aware that the cost of his policy may be influenced by various personal factors. As James meets with his financial planner to discuss his options, which of the following factors should he expect to affect the cost of his disability income insurance policy?

A. Age
B. Gender
C. Occupation
D. All of the above

Answer 4

D. All of the above

The cost of a disability income insurance policy is influenced by several factors, including the age, gender, and occupation of the insured. As individuals age, the risk of disability increases, which often leads to higher premiums. Gender can play a role in determining insurance costs due to statistical differences in life expectancy and disability rates between men and women. Occupation is also a significant factor because some professions carry higher risks of disability than others. A software engineer like James may have a lower risk compared to a construction worker, but his premiums will still be calculated based on these three factors combined.

C.20 Disability income insurance (individual and group)

Question 5

John is a construction worker who was injured on the job and is now unable to work for an unspecified period of time. Which type of disability income insurance policy would be most beneficial for him?

A. Short-term disability
B. Long-term disability
C. Own-occupation disability
D. Any of the above

Answer 5

B. Long-term disability

C.20 Disability income insurance (individual and group)

Question 6

Sarah is a self-employed graphic designer who is unable to perform the duties in her line of work due to a medical condition. Which type of disability income insurance policy would be most beneficial for her?

A. Short-term disability
B. Long-term disability
C. Own-occupation disability
D. Any of the above

Answer 6

C. Own-occupation disability

C.20 Disability income insurance (individual and group)

Question 7

Jack is a high-income earner who wants to protect his income in case he becomes disabled. Which type of disability income insurance policy would be most beneficial for him?

A. Short-term disability
B. Long-term disability
C. Own-occupation disability
D. Any of the above

Answer 7

C. Own-occupation disability

C.20 Disability income insurance (individual and group)

Question 8

Jonathan, a 40-year-old graphic designer, recently purchased a disability income insurance policy with a monthly benefit of $3,500 to protect his earnings in case he becomes unable to work due to an injury or illness. The policy includes a specific term that requires Jonathan to wait for a certain duration before he can start receiving the disability benefits after being diagnosed with a disabling condition. In Jonathan’s disability income insurance policy, what is the purpose of the elimination period?

A. The waiting period before benefits are paid out.
B. The period during which Jonathan is unable to work due to his condition.
C. The period during which Jonathan is considered partially disabled.
D. The period during which Jonathan is considered fully disabled.

Answer 8

A. The waiting period before benefits are paid out.

The elimination period in a disability income insurance policy is a type of deductible period—it is the duration from the onset of a disability until benefits begin to be paid out. It is essentially a waiting period. This period can vary in length from policy to policy and is chosen by the insured at the time of purchase. It is not directly related to the severity or type of disability, but rather is a predefined period that must pass before the insurance company starts paying the benefits, regardless of the insured’s ability to work.

C.20 Disability income insurance (individual and group)

Question 9

Maggie, a 38-year-old graphic designer, recently suffered a back injury that has limited her ability to work full-time in her current profession. While Maggie has partially recovered and can work part-time in a less demanding role, her income has significantly decreased. Maggie has a disability income insurance policy. Which of the following best describes the situation Maggie would be in if her policy includes coverage for residual disability?

A. Maggie is unable to perform her own occupation as a graphic designer but can work in a reduced capacity elsewhere, and her policy may provide partial benefits.
B. Maggie is unable to perform any occupation at all, and her policy will provide full benefits.
C. Maggie has a permanent disability, and her policy will provide benefits for an indefinite period.
D. Maggie has a temporary disability, and her policy will only provide benefits for a short, specified period.

Answer 9

A. Maggie is unable to perform her own occupation as a graphic designer but can work in a reduced capacity elsewhere, and her policy may provide partial benefits.

Residual disability coverage in a disability income insurance policy is designed for situations where the insured is not totally disabled but suffers a loss of income due to their inability to perform all of their job duties at full capacity. The coverage allows the insured to receive partial benefits proportionate to the loss of income. Since Maggie can still work, but not in her chosen profession and only part-time, this scenario is an example of residual disability.

C.20 Disability income insurance (individual and group)

Question 10

Lisa is a nurse who suffered an injury outside of work and is unable to work for a few months. Which type of disability income insurance policy would be most beneficial for her?

A. Short-term disability
B. Long-term disability
C. Own-occupation disability
D. Any of the above

Answer 10

A. Short-term disability

C.20 Disability income insurance (individual and group)

Question 11

Mark is a lawyer who was in a car accident and suffered a permanent disability. Which type of disability income insurance policy would be most beneficial for him?

A. Short-term disability
B. Long-term disability
C. Own-occupation disability
D. Any of the above

Answer 11

B. Long-term disability

C.20 Disability income insurance (individual and group)

Question 12

Rachel is a teacher who suffered a mental illness and is unable to perform her job duties. Which type of disability income insurance policy would be most beneficial for her?

A. Short-term disability
B. Long-term disability
C. Own-occupation disability
D. Any of the above

Answer 12

C. Own-occupation disability

C.20 Disability income insurance (individual and group)

Question 13

What is the benefit period in a disability income insurance policy?

A. The waiting period before benefits are paid out
B. The period during which the insured is unable to work
C. The period during which the insured is partially disabled
D. The period during which benefits are paid out

Answer 13

D. The period during which benefits are paid out.

C.20 Disability income insurance (individual and group)

Question 14

What is the definition of partial disability in a disability income insurance policy?

A. The insured is unable to perform their own occupation
B. The insured is unable to perform any occupation
C. The insured is unable to perform a certain number of activities of daily living
D. The insured is able to work but experiences a loss of income due to a disability

Answer 14

D. The insured is able to work but experiences a loss of income due to a disability.

C.20 Disability income insurance (individual and group)

Question 15

Tina is a marketing executive for ABC Computer Company, Inc. ABC provides a comprehensive benefits package to its employees, which includes short-term disability coverage. The company has bought a group disability policy to fund this benefit, and it fully covers the cost of the policy premiums. Which of the following statements best describes the income tax consequences of this plan to ABC and Tina?

A. Tina will have to pay income tax on the benefit amount when received, and ABC can deduct the premium payments as a business expense.
B. Tina will not have to pay income tax on the benefit amount when received, and ABC cannot deduct the premium payments as a business expense.
C. Tina will have to pay income tax on the benefit amount when received, but ABC cannot deduct the premium payments as a business expense.
D. Tina will not have to pay income tax on the benefit amount when received, and ABC can deduct the premium payments as a business expense.

Answer 15

A. Tina will have to pay income tax on the benefit amount when received, and ABC can deduct the premium payments as a business expense.

When an employer pays the premiums for a disability insurance policy and doesn’t include the premium amounts in the employee’s taxable wages, any benefits the employee receives under the policy are taxable to the employee. Thus, Tina would need to pay income tax on the disability benefits when received. On the other side, ABC can deduct the premium payments as an ordinary and necessary business expense.

C.20 Disability income insurance (individual and group)

Question 16

Mia is an advisor consulting a small business firm, Anderson Enterprises, which is considering disability insurance for its employees. The firm has only six employees, and they are evaluating whether to opt for a group disability contract or individual disability contracts for each employee.

Which of the following would MOST likely be a major benefit of the group disability policy over the individual disability contracts for Anderson Enterprises?

A. Lower premiums due to the size of the group.
B. A more comprehensive coverage.
C. No requirement for medical examinations.
D. Guaranteed renewable terms.

Answer 16

C. No requirement for medical examinations.

Group disability insurance policies often do not require medical examinations, making it easier and faster for employees to get coverage. On the other hand, individual disability policies might require medical underwriting which could lead to increased premiums or even denial of coverage for some employees based on their health. This feature is especially beneficial for a small group like Anderson Enterprises with only six employees.

C.20 Disability income insurance (individual and group)

Question 17

Samantha, a 34-year-old software developer, is looking into disability income insurance policies. She wants a policy that will continue to pay benefits even if she is able to work in another occupation due to her disability. Which type of disability insurance policy should Samantha consider?

A. Non-cancelable
B. Guaranteed renewable
C. Own-occupation
D. Any-occupation

Answer 17

C. Own-occupation

Own-occupation disability insurance policies provide benefits when the insured is unable to perform the duties of their specific occupation, even if they are capable of working in a different occupation. This contrasts with any-occupation policies, which only pay benefits if the insured is unable to work in any job reasonably suitable by education, experience, and age.

C.20 Disability income insurance (individual and group)

Question 18

Mark is evaluating group disability income insurance provided by his employer. He is concerned about how much of his salary would be covered in the event of a disability. Generally, what percentage of an employee’s salary is typically replaced by group disability income insurance?

A. 30-40%
B. 50-60%
C. 70-80%
D. 90-100%

Answer 18

B. 50-60%

Most group disability income insurance policies are designed to replace approximately 50-60% of the insured’s gross salary. This percentage can vary depending on the policy specifics and additional riders or provisions the employee may choose.

C.20 Disability income insurance (individual and group)

Question 19

Linda has a disability income policy with a 90-day elimination period. If Linda becomes disabled, what does the elimination period refer to?

A. The period during which benefits are paid
B. The period before disability benefits start
C. The period during which premiums are waived
D. The period Linda needs to be employed to qualify for benefits

Answer 19

B. The period before disability benefits start

The elimination period in a disability income insurance policy is the waiting period between the onset of a disability and the commencement of benefit payments. In this case, Linda would need to wait 90 days after becoming disabled before receiving benefits.

C.20 Disability income insurance (individual and group)

Question 20

Thomas, an architect, has both an individual disability income policy and a group policy through his employer. If he becomes disabled, how will his benefits likely be coordinated?

A. Benefits from both policies will be fully integrated.
B. Benefits from both policies will be paid in full without offset.
C. Benefits from the group policy will reduce the benefits from the individual policy.
D. Benefits from the individual policy will reduce the benefits from the group policy.

Answer 20

C. Benefits from the group policy will reduce the benefits from the individual policy

Typically, group disability policies are primary, and any benefits received reduce the amount payable under an individual disability income policy. This coordination of benefits is designed to prevent over-insurance and maintain incentives for returning to work.

C.20 Disability income insurance (individual and group)