MATH HUB Flashcards
DI policies pay a tax-free disability benefit. Usually, it is limited to 60% of net pre-tax pre-disability income, calculate this example.
Salary x 60% = DI benefit
$80,000, x 60% = $48,000
Calculate the amount of disability benefit for business owners & self employment.
Business income — expenses x 60%
($70,000 - $12,000) x 60% = $34,800
Calculate the amount of disability benefit for business owners & self employment. with unearned income
- Business income — expenses + unearned x 60%
- Prorated DI benefit — unearned income = DI benefit
- ($70,000 — $12,000) + $20,00 x 60% = $46,800
- $46,800 — $20,000 = $26,800
What are the calculations for residual disability?
- If client can earn 80% or more of his income after disability, he will not be able to get residual disability
- Full-time income (before disability) = $80,000
- Part-time income (after disability) = $32,000,
- DI Benefit = $3,000 (45% of his income)
Pre-disability income — part-time income ÷ Pre-disability income = Percentage
- $80,000 — $32,000 ÷ $80,000 = 60%
While working part-time, Jorge would receive 60% of his maximum disability benefit, or $1,800 a month ($3,000 × 60%). Combined with the $2,667 a month that Jorge would earn in salary ($32,000 ÷ 12), he would total $4,467 a month (or $53,604 a year)
Amount of benefit
August earns $65,000 annually and receives an additional $5,000 in royalty income. His royalty income will continue in the event of a disability.
What is the maximum DI coverage an insurance company would offer August?
The maximum DI coverage an insurance company would offer August is $37,000.
(65,000 + 5,000) × 60% = $42,000
42,000 - 5,000 = $37,000
- Check it:
Total annual before-tax income = 65,000 + 5,000 = $70,000
(37,000 + 5,000) ÷ 70,000 = 0.6 = 60%
Ref 2.2.2.1
Amount of benefit
Edeline is self-employed and earns $36,700 as a hair stylist annually. She also has $5,880 annual income from a trust fund her parents set up for her.
What is the maximum DI coverage an insurance company would offer Edeline?
The maximum DI coverage an insurance company would offer Edeline is $19,668.
(36,700 + 5,880) × 60% = $25,548
25,548 - 5,880 = $19,668
Check it:
Total annual before-tax income = 36,700 + 5,880 = 42,580
(19,668 + 5,880) ÷ 42,580 = 0.6 = 60%
2.2.2.1
Marcus is a financial advisor and earns 80,000 annually.
He was previously employed by a financial company that will continue to pay him a level income of $1,500 monthly regardless of his working status.
What is the maximum DI coverage an insurance company would offer Marcus?
The maximum DI coverage an insurance company would offer Marcus is $40,800.
Additional income on an annual basis = 1,500 × 12 = $18,000
(80,000 + 18,000) × 60% = $58,800
58,800 - 18,000 = $40,800
- Check it:
Total annual before-tax income = 80,000 + 18,000 = $98,000
(40,800 + 18,000) ÷ 98,000 = 0.6 = 60%
Continued
Rose earns $7,000 in royalties annually from a book she wrote.
This income will continue for her lifetime regardless of her working status.
Rose’s main source of income is her job as director of a continuing education firm which pays $120,000/year.
What is the maximum DI coverage an insurance company would offer Rose?
The maximum DI coverage an insurance company would offer Rose is $69,200.
(120,000 + 7,000) × 60% = $76,200
76,200 - 7,000 = $69,200
- Check it:
Total annual before-tax income = 120,000 + 7,000 = 127,000
(69,200 + 7,000) ÷ 127,000 = 0.6 = 60%
Deva was earning $90,000 when she took out her disability income replacement policy, which covers 60% of her income.
Two years ago, Deva reduced her work hours and she now earns $75,000.
If Deva were to become disabled now, what would her maximum monthly benefit be?
If Deva were to become disabled now, her maximum monthly benefit would be $3,750 per month.
75,000 × 60% = 45,000
45,000 ÷ 12 = $3,750
Cole took out a disability income replacement policy several years ago which would cover 60% of his income. He was earning $32,000 a year, but since the store he works at was bought by a new chain, his salary is now $28,000.
If Cole were to become disabled now, what would his maximum monthly benefit be?
If Cole were to become disabled now, his maximum monthly benefit would be $1,400 per month.
28,000 × 60% = 16,800
16,800 ÷ 12 = $1,400
Kasia was earning $90,000 when she took out a DI policy for 60% of her income with a 20% FPO rider.
How much of an increase would the FPO rider allow for per month?
According to the rider, Kaisa would be entitled to an increase of 20% of her current policy benefit. This amounts to $900/mo.
Rationale:
Kasia’s current DI insurance would pay her $4,500 per month:
(90,000 × 60%) ÷ 12 = $4,500
4,500 × 20% = $900
Kasia’s FPO would allow for an increase of up to $900 per month, without medical underwriting, if she financially qualifies.
Kasia was earning $90,000 when she took out a DI policy for 60% of her income with a 20% FPO rider.
A little over a year later, she received a raise to $93,500.
What is the maximum amount per month that Kasia’s DI policy will pay, based on her new salary?
Based on her new salary of $93,500/year, Kasia would qualify for $4,675 per month of DI coverage.
Rationale:
Kasia’s increase is subject to the 60% rule as applied to her new salary:
(93,500 × 60%) ÷ 12 = $4,675
This represents the maximum amount Kasia’s DI policy will pay based on the 60% rule.
Kasia was earning $90,000 when she took out a DI policy for 60% of her income with a 20% FPO rider and she now is earning $93,500 this year.
What is the allowable increase that Kasia qualifies for, based on these calculations?
a) 900
b) 175
Kasia qualifies for an allowable increase of $175 per month of coverage without medical underwriting.
Rationale:
Remember, Rule #2 states that the applicant’s increase is maximized at whichever is LESS of the 20% allowance or 60% qualification. Since Kasia already has a policy worth $4,500/mo, the most she can increase her policy to is the difference between that amount and 60% of her present salary.
Check to see if this is less or more than the 20% FPO allowance:
4,675 - 4,500 = $175
$175 < $900
Therefore, Kasia qualifies for an allowable increase of $175 and can raise her coverage from $4,500 per month to $4,675 per month without medical underwriting.
She cannot use all of the FPO 20% allowance of $900 because it would calculate to an amount that exceeds the 60% rule for her new salary.
(4,500 + 900) × 12 = $64,800
64,800 ÷ 93,500 = 0.693 (69%)
Melissa was earning $56,000 when she took out a DI policy for 60% of her income with a 20% FPO rider. Melissa’s income has since increased to $64,000 and she would like to increase her DI policy.
What is the allowable increase that Melissa qualifies for, based on these calculations?
Melissa can exercise the FPO to acquire an additional $400 of coverage.
Current Coverage = (56,000 × 60%) ÷ 12 = $2,800
FPO rider allowance = 2,800 × 20% = $560
Financial qualification based on current salary = (64,000 × 60%) ÷ 12 = $3,200
Qualified increase = 3,200 - 2,800 = $400
Therefore, Melissa is qualified to use $400 of the $560 FPO allowance. She can raise her coverage from $2,800 per month to $3,200 per month without medical underwriting.
Brian works full time installing solar panels, earning $90,000 per year. He took out a DI policy with a standard residual disability clause and a 60% income benefit for this wage. Seven months ago, Brian was injured and was completely off work, collecting his DI coverage after the required waiting period. Starting next month he can return to work 2 days per week.
What is the maximum disability benefit Brian received for the months he was eligible for the full coverage?
Brian received 60% of his pre-disability income according to his coverage, $4,500.
90,000 × 60% = $54,000
54,000 ÷ 12 = $4,500
[Ref. 2.2.4.6]
Brian works full time, 5 days per week installing solar panels, earning $90,000 per year. He took out a DI policy with a standard residual disability clause and a 60% income benefit for this wage. Seven months ago, Brian was injured and was completely off work, collecting his DI coverage after the required waiting period. Starting next month he can return to work 2 days per week.
How much part-time employment income will Brian be earning?
Brian’s part-time employment income is $3,000.
2 ÷ 5 = 0.4 = 40%
90,000 × 40% = $36,000
36,000 ÷ 12 = $3,000
[Ref. 2.2.4.6]
Lamar’s income is $56,000 per year. He has a DI policy with a standard residual disability clause and a 50% benefit of this income. Lamar was injured in a serious cycling accident and was off for a year, living off his DI coverage after the standard waiting period passed. Today his doctor advised him he can start back at work part-time. He will be able to work enough to make $19,600 per year.
Calculate how much residual disability benefit coverage Lamar is entitled to collect.
Lamar is entitled to $1,516.67 per month in residual DI benefits.
Total coverage Lamar was entitled to = 56,000 × 50% = $28,000
28,000 ÷ 12 = $2,333.33 per month
Percentage of coverage to be paid = (56,000 - 19,600) ÷ 56,000 = 0.65 = 65%
Benefit entitlement = 2,333.33 × 65% = $1,516.67
[Ref. 2.2.4.6]
Kunani was earning $42,000 when she took out a DI policy with a standard residual disability clause and a 50% benefit of her income. Kunani was injured and has not worked for two years. Recently her doctor told her that she can start a return-to-work program on a part-time basis. She will earn 25% of her pre-disability income in this first phase of the program.
What will Kunani’s total monthly income be until she can return to work in an increased capacity?
Kunani will be able to earn $2,187.50 per month until she can return to work on an increased capacity.
Total coverage Kunani was entitled to = 42,000 × 50% = $21,000
21,000 ÷ 12 = $1,750/mo
Part-time employment income = $42,000 × 25% = $10,500
10,500 ÷ 12 = $875 per month
Percentage of coverage to be paid = (42,000 - 10,500 ) ÷ 42,000 = 0.75 = 75%
Benefit entitlement = $1,750 × 75% = $1,312.50
Total monthly income = 875 + 1,312.50 = $2,187.50
[Ref. 2.2.4.6]
Mackenzie works 5 days per week earning $78,000 as a programmer. He took out a DI policy with a standard residual disability clause and a 45% benefit of this income. He was injured and completely off work for 8 months. After the 90-day waiting period he qualified for benefits. He’s better and can now work 3 days per week.
What will Mackenzie’s new total monthly income be until he can return to work in an increased capacity?
Makenzie will receive $5,070 per month until he can return to work in an increased capacity.
Total coverage Mackenzie was entitled to = 78,000 × 45% = $35,100
35,100 ÷ 12 = $2,925/mo
Part-time employment income:
3 ÷ 5 = 0.6 = 60%
78,000 × 60% = $46,800
46,800 ÷12 = $3,900 per month
Percentage of coverage to be paid = (78,000 - 46,800 ) ÷ 78,000 = 0.4 = 40%
Benefit entitlement = $2,925 × 40% = $1,170
Total monthly income = 1,170 + 3,900 = $5,070
Victoria is a member of an employer-group DI program which provides maximum long-term disability coverage of 65% of salary, or $4,500 per month, whichever is less. Victoria earns $85,000 a year.
If Victoria needs to make a claim for DI coverage, what is the maximum she could receive?
Victoria would qualify for $4,500, which is the plan maximum and the lower of the two amounts.
Income-based maximum coverage: (85,000 × 65%) ÷ 12 = $4,604.17
Group Plan maximum coverage = $4,500
[Ref. 2.3.4.3]
Donna is a member of an employer-group DI program which provides maximum long-term disability coverage of 70% of salary, or $4,000 per month, whichever is less. Victoria earns $65,000 a year.
If Donna needs to make a claim for DI coverage, what is the maximum she could receive?
Donna would qualify for $3,791.67, which is her income-based maximum and the lower of the two amounts.
Income-based maximum coverage: (65,000 × 70%) ÷ 12 = $3,791.67
Group Plan maximum coverage = $4,000
[Ref. 2.3.4.3]
Jamie works for a company that offers group DI coverage. The non-evidence maximum amount of LTD coverage is 50% of salary. The maximum overall benefit is set at 70% of salary, to a maximum of $5,000 a month.
Jamie earns $85,000 a year and has elected to take full coverage. Jamie would like to know what his coverage could provide, assuming he qualifies at the time.
How much could Jamie be covered for on a non-evidence basis?
Jamie could be covered for $3,541.67 on a non-evidence basis.
(85,000 × 50%) ÷ 12 = $3,541.67
[Ref. 2.3.4.3]
Jamie works for a company that offers group DI coverage. The non-evidence maximum amount of LTD coverage is 50% of salary. The maximum overall benefit is set at 70% of salary, to a maximum of $5,000 a month.
Jamie earns $85,000 a year and has elected to take full coverage. Jamie would like to know what his coverage could provide, assuming he qualifies at the time.
How much additional coverage could Jamie be eligible for with medical underwriting?
Jamie could be eligible for an additional $1,416.66 in coverage with medical underwriting.
(85,000 × 70%) ÷ 12 = $4,958.33
(85,000 × 50%) ÷ 12 = $3,541.67
4,958.33 - 3,541.67 = $1,416.66
Hedwig earns $48,000 a year as an editor. She has a company LTD policy that covers 66.67% of her pre-disability income with an all-source benefits maximum of 75%. Her accident happened at the office, so Hedwig also qualified for a Workplace Safety & Insurance Board payment of $900 per month.
What will her total income be per month from both sources?
Between both plans, Hedwig would receive $3,566.80/mo.
Hedwig’s disability coverage is 66.67% of her pre-disability income:
($48,000 × 66.67%) ÷ 12
= 32,001.60 ÷ 12
= $2,666.80/mo
The Workplace Safety & Insurance Board will provide her with $900 per month
Hedwig’s total monthly income will be:
2,666.80 + 900 = $3,566.80
