EXAM PRACTICE QUESTIONS Flashcards
The Red Table Industries, a manufacturing company, offers its employees a benefits package that includes long-term disability coverage of 60% of salary to a maximum of $5,500 a month. Jonah and Clive earn $140,000 and $90,000 a year respectively.
They were injured on a work ski trip and now need to collect disability benefits.
After a three-month waiting period, what will their monthly disability benefit be?
a) Clive will receive $4,500 monthly and Jonah will receive $5,500 monthly.
b) Clive will receive $5,500 monthly and Jonah will receive $7,000 monthly.
c) Clive will receive $4,500 monthly and Jonah will receive $7,000 monthly.
d) They will both receive the maximum benefit of $7,000 monthly.
Jonah and Clive are members of the same employer-group DI program which provides for maximum long-term disability coverage of 60% of salary, or $5,500 a month, whichever is less.
Jonah, who earns $140,000 a year, qualifies for a maximum benefit of $5,500 a month because he qualifies for $7,000 a month (($140,000 × 60%) ÷ 12), which is $1,500 above the allowable limit.
Clive, who earns $90,000 a year, receives the maximum monthly benefit of $4,500 as his salary permits (($90,000 × 60%) ÷ 12).
The percentage of earnings that will be considered in setting the overall maximum coverage will, in part, depend on whether benefits will be treated as taxable income or will be non-taxable. Short-term disability (STD) benefits are typically in the higher percentage range, 70% to 75% of pre-disability income, allowing for the fact that STD benefits are normally taxable. Long-term disability (LTD) benefits, which are usually structured to be tax-free, are typically based on a lower percentage of salary, in the 60% to 66.66% range.
Stephen has been on long-term disability for most of 2019. In this plan, the employee pays 100% of the premiums. Identify the correct statement regarding the taxation of the premiums paid and benefits received by Stephen.
a) Stephen receives the benefits tax-free and the premiums are not tax deductible for Stephen.
b) Stephen must pay tax on the benefits received and the premiums are tax deductible for Stephen
c) Stephen receives the benefits tax-free and the premiums are tax deductible for Stephen.
d) Stephen must pay tax on the benefits received and the premiums are not tax deductible for Stephen.
In the case of LTD coverage, if the premiums are paid by the employer, the benefits received by the employee will be taxable income. As with STD, the employer-paid premiums are a deductible expense. However, if the employee/plan member pays 100% of the premium, the benefits will be received tax-free. The premiums are not eligible for a tax deduction.
[Ref: 2.3.5]
Gareth earns an income of $90,000 a year and has a disability policy that will pay him $4,000 a month in the event of him suffering a total disability with a standard residual disability clause. Gareth was seriously injured while climbing Kilimanjaro on a trip to Africa and was off work for 10 months. He received disability benefits of $4,000 a month for seven months. He is now approved to return to work two days a week. As a result, his earnings have been reduced to the monthly equivalent of $36,000 a year.
What will Gareth’s total monthly income be as a result of his change in work schedule?
a) $5,400
b) $2,400
c) $3,000
d) $4,000
Maximum disability income = Pre disability income - part-time income\Pre disability income
Maximum disability income = $90,000 - $36,000 $90,000 = 60%
While working part-time, Gareth would receive 60% of his maximum disability benefit, or $2,400 a month ($4,000 × 60%). Combined with the $3000 a month that Gareth would earn in salary ($36,000 ÷ 12), he would total $5,400 a month (or $64,800 a year).
[Ref:2.2.4.6]
Nancy receives full benefits from her employer, including short and long-term disability. She is concerned about the possible tax implications of receiving disability benefits.
If her employer pays 100% of the STD & LTD premiums, what will be the tax implications of Nancy’s group disability insurance benefits?
a) STD and LTD coverages that are fully paid for by the employer means that the benefits received are treated as taxable income.
b) When STD coverage is fully paid by the employer the benefits are received tax-free. LTD benefit is treated as taxable income.
c) LTD coverage is tax-free income because the disability is prolonged and severe. STD benefit is treated as taxable income.
d) LTD and STD coverages are fully paid for by the employer and benefits are partially received as taxable income to a 60% threshold.
If Nancy’s short and long-term disability premiums are paid for by her employer, any benefits she receives will be considered taxable income. If she makes a claim, she will need to include any income she receives from the policy while on disability as a part of her income and pay tax accordingly.
Since short-term benefits are typically a larger percentage of pre-disability income (often in the 70-75% range), a plan member on claim should still be able to live on the after-tax benefit.
With LTD coverage, the insured will receive a benefit of about 60% of pre-disability income.
Regardless of whether the coverage is LTD or STD, if the premiums are paid for by the employer, the benefits received by the employee will be taxable income. For both types of coverage, if the employer is paying the premiums for Nancy’s disability coverage, they are considered a deductible business expense for income tax purposes.
If Nancy pays 100% of the premium, the benefits she receives will be received tax-free. The plan is then taxed in the same way as a personally owned DI policy. For this reason, most LTD coverage found in contributory group insurance plans is structured as such that the employee pays 100% of the premium for the LTD coverage.
[Ref: 2.3.5]
Kevin fractured his foot while supervising the delivery of a shipment at work. His disability insurance policy has a long waiting period and Kevin was concerned about paying for his monthly expenses. His doctor recommended that he remain at home for another month, but Kevin decided to return to work earlier. He believes that by going back to work earlier, he will be able to catch up on the payment of his bills. During his first week back at work, Kevin slips and re-injures his foot.
In the absence of a recurrent disability clause in Kevin’s contract, what outcome can be expected?
a) Kevin has to wait another waiting period without disability benefits.
b) Kevin will receive a reduced sum because he returned to work earlier than advised.
c) Kevin will not receive benefits and will not be paid out for his second injury.
d) Kevin will start receiving disability benefits immediately without a waiting period
Kevin may experience another waiting period for his disability benefits to start.
Since Kevin’s policy has a long waiting period and he returned to work early, he will actually have waited two waiting periods within a short amount of time. A long waiting period can have a significant financial effect and it is important that the insured is aware of how long they will be without income.
Often, an advisor will recommend that the insured has an emergency savings account to cover expenses during the waiting period.
A shorter waiting period can have a higher premium, but it might be important for clients who do not have the additional savings to rely on while they wait for their disability income. In Kevin’s situation, he did not have an emergency savings account and decided to go back to work early.
Now, if he is required to wait for the waiting period again, he will have had an extremely long period without an income and will likely not be able to cover his expenses.
The recurring or recurrent disability clause found in many DI contracts is designed to prevent subjecting the insured to two, or more, waiting periods, without benefits.
[Ref: 2.2.2.7]
Maria works in a factory that produces dishwashers. In addition to her group coverage, she carries an individual disability insurance policy. She has added a rider to her policy that will pay her a benefit of 50% of the total disability benefit if she cannot work full time or is prevented from performing one or more key tasks of her job.
Which rider does Maria have on her disability policy?
a) Partial disability rider
b) Residual disability rider
c) Presumptive disability rider
d) Return of premium rider
A partial disability rider typically pays 50% of the total disability benefits if the insured is unable to work full-time but is not considered fully disabled.
(Refer to Section 2.2.4.6)
Judith owns a disability policy with optional riders which she has added to her policy. She had a severe back injury last year and was off work for almost the whole year. Her advisor asks her to apply for an increase of 20% of her base policy. To her surprise, Judith is granted the increase at standard rates despite the severe back injury she had suffered in the past and the recurring back pains that she periodically gets.
Under which rider in her policy did she obtain the increase without her medical condition being considered?
a) Cost of living adjustment (COLA) rider
b) Coverage enhancement rider
c) Exclusion rider
d) Future purchase option (FPO) rider
The future purchase option (FPO) rider guarantees the insured the right to purchase additional coverage in the future, regardless of future changes in the life insured’s health.
(Refer to Section 2.2.4.3)
Jude owns a company that manufactures winter gear. The business has been quite profitable so far and he hopes his son will take over the business and carry on his legacy. Jude’s goal of business succession directly translates to which of the following individual goals?
a) Capital protection
b) Income protection
c) Protection of estate value
d) Protection of family value
Many business owners consider their business to be their legacy: to carry on their reputation and identity beyond their working lives. And many of those would like to see the business eventually taken over by their children. The business succession goal for the business owner translates directly into their individual goal of capital protection.
Ref: 1.2.1
Jeff is an executive at Capital Systems Inc. Capital Systems purchases an individual disability insurance policy based on Jeff’s life. Jeff becomes disabled, is unable to work, and is receiving disability benefit payments from the policy. Which statement best describes Jeff’s eligibility for employment insurance (EI)?
a) EI has a waiting period of one week.
b) Jeff would not be eligible for EI.
c) EI would be the first payor.
d) EI has a maximum 25-week benefit period.
Some plans insuring lower-paid workers stagger their waiting and benefit periods to co-ordinate benefit payments with employment insurance (EI) benefits.
EI has a maximum 15-week benefit period after a waiting period of one week, but EI is a second payor to many other forms of disability coverage, including group plans.
Plans designed to co-ordinate with EI and avoid the dollar-for-dollar offset of EI benefits will pay a first-day benefit for one week, then no benefits for the next 15 weeks, resuming benefits at the beginning of week 17, that is, at the end of the EI benefit period.
[Ref: 2.2, 2.3.2.1]
Daniel is earning $80,000 a year when he decided to apply for disability insurance. After the medical and financial underwriting, Daniel was issued a DI policy with coverage of $4,000 a month. Daniel also included a Future Purchase rider just in case his salary changes. The FPO allows him to increase coverage by 20% of his original coverage this year.
If Daniel’s salary increases by $10,000, what will Daniel’s new disability benefit be if he exercises the FPO option?
a) $4,500
b) $4,800
c) $4,000
d) $4,166
Daniel’s policy has a Future Purchase Option (FPO) rider which permits him to increase coverage by 20%, or $800 ($4,000 x 20%) a month. The coverage increase will be dependent on Daniel’s ability to qualify financially. His income has increased by $10,000, equaling to $90,000 a year.
At his new income level, Daniel could qualify financially for $4,500 a month of disability coverage.
(60% × $90,000) ÷ 12 = $4,500
Daniel already holds $4,000 a month of coverage. If he exercises the FPO to acquire an additional coverage, he will only financially qualify for $500 a month of coverage despite the option allowing for up to $800 a month of coverage without medical underwriting.
In order to exercise an FPO option, Daniel must provide the insurer with proof of current income. Also, exercising the FPO would add additional coverage, resulting in a corresponding increase in premium.
[Ref: 2.2.4.3]
Bryana has been receiving disability benefits from her group disability plan and finds out that she needs an additional three months of recovery for her injury. At the end of the month, her group plan will reach the maximum time limit to continue paying benefits. Fortunately, Bryana prepared for the possibility that she would need additional time on disability and will continue to receive disability income by:
a) purchasing an individual plan with the same benefit level and definition of disability as her group plan.
b) applying to WSIB to receive additional disability income for the next few months.
c) receiving her vacation pay for the initial part of her injury and delaying her disability payments.
d) increasing the waiting period on her disability plan and liquidating her savings to meet her income needs.
Bryana purchased an individual disability policy. By purchasing an individual policy, Bryana has extended the length of time that her benefits are available under her group contract. Her individual policy will have the same benefit level and definition of disability as her group policy. The individual policy benefit period would extend her benefits payable, so once her group policy has reached its maximum time limit, her individual policy will provide her with an ongoing stream of income. The key to ensuring ongoing disability income is the waiting period. The waiting period of the individual policy is set to begin when the group plan will end and is connected to the group policy benefit period.
[Ref: 2.3.6]
Amanda starts work with her new employer on September 1. The employer has a group benefits plan including STD and LTD coverage; however, Amanda is not eligible to join the plan until December 1. Which term properly describes this initial period when Amanda is not eligible for group benefits?
a) Qualification period
b) Waiting period
c) Probation period
d) Elimination period
Amanda must satisfy the qualification period of three months as set by her employer. Most group disability plans require a new employee to undergo a qualification period before they can join the group plan, which coincides with the probationary period. The qualification period is a set number of days that must expire between the date of employment and the date that the employee qualifies to join the group plan. Although the probation period coincides with the waiting period, ineligibility represents the qualification period.
The waiting period, also called the “elimination period,” is the time frame between the onset of the disability and the commencement of benefits under the policy.
Joey, aged 35, has recently purchased a critical illness insurance policy for his 5-year-old daughter, Madeleine. What condition is commonly covered in a plan for minors that is not covered in adult plans?
a) Type 1 diabetes
b) Stroke
c) Multiple sclerosis
d) Kidney failure
Policies for children (under age 18) typically cover most, or all, of the conditions insured by comprehensive plans. They also cover a variety of conditions that are more closely associated with minors, such as
- Muscular dystrophy;
- Type 1 diabetes;
- Cerebral palsy;
- Cystic fibrosis.
[Ref: 3.1.2]
Avi purchases a critical illness policy in July. On September 16, Avi suffers from a heart attack and applies for benefits under his policy. Sadly, he dies on November 10, before the payment is approved.
Who will receive Avi’s insurance benefit?
a) Avi’s estate will receive the benefit, as he survived 30 days after he was diagnosed.
b) No benefits will be payable, as benefits are only payable to those who survive the covered condition.
c) No benefits will be payable, as the benefit payment was not approved before he died.
d) Avi’s estate will receive the benefits only for October, as he died in November.
Avi’s estate will be paid the benefits, as he survived 30 days after the diagnosis even though the claim had not yet been approved.
STUDY REFERENCE: 3.1, 3.1.2, 3.1.5
Maria purchases an LTC policy from ABC Insurance, with benefit payments under the reimbursement model for a daily benefit of $200. Maria subsequently moves into a long-term care facility and is eligible for benefits under this policy. The cost of Maria’s expenses is $150 per day.
How are Maria’s benefits paid in this case?
a) $200 per day paid to Maria
b) $200 per day paid to the long term care facility
c) $150 per day paid to Maria
d) $150 per day paid to the long term care facility
Maria has chosen the reimbursement model. She must pay the expenses first and then can only claim the amount she actually spent ($150), not the maximum amount of $200. Long-term care benefits can be paid directly to the service provider like a nursing home (indemnity model) or, more often in the case of home care, to compensate the patient for expenses already paid for out of pocket (reimbursement model). Reimbursement is determined as a maximum amount per day or per service/equipment, and the insured is only reimbursed for the amount actually spent on care.
STUDY REFERENCE: 3.3.5 Policy benefits
