OVERVIEW 2 (LLQP Flashcards)
Amanda is 35 years old and works as an office manager for a medium-sized Canadian company. She has been discussing the purchase of an individual disability insurance policy with her life insurance agent. She has to choose between a cancellable and a non-cancellable policy. Which would be the best choice?
Non-cancellable.
A cancellable policy can be cancelled; its premiums increased, benefits reduced, or restrictions imposed by the insurer at renewal when the claims for the class are higher than anticipated.
A non-cancellable policy provides the highest level of protection to the insured and, consequently, has the highest premiums. The policy is guaranteed to renew until the insured reaches 65. The insurer cannot cancel the policy, increase the premiums, add restrictive riders, or reduce benefits.
(Refer to Section 2.2.1.1, 2.2.1.3)
Mike is considering purchasing an individual disability insurance policy. His agent has recommended that Mike add a Cost-of-Living Adjustment (COLA) rider to his policy. What benefit would this add to the policy?
It addresses the impact inflation has on the purchasing power of a fixed income.
The Cost-of-Living Adjustment rider is selected by the policy owner to increase benefits based upon the Consumer Price Index (CPI). If increases are compounded monthly, a more generous benefit will be received.
This rider is essential for a young policy owner; if the policy owner is disabled for life at a young age, the purchasing power of the benefit would be greatly diminished as the years progressed in the absence of a COLA rider.
(Refer to Section 2.2.4.4)
On Friday evening, Alf fell and broke his leg. His leg was set in a plaster cast, and he was sent home. Alf returned to work on Monday morning.
Alf has a Regular Occupation individual disability policy that has a 5-year benefit period and a 60-day elimination period.
Will Alf’s individual disability policy pay him for this disability?
No.
Alf has not met the conditions of the policy to qualify for disability payments.
(Refer to Section 2.2.3.3)
Quan is a 34-year-old dentist. She owns an “own occupation” individual disability policy with a benefit period up to age 65 and a 30-day elimination period that has been in force for 7 years.
Quan has been suffering from depression for the last two years. She recently attempted suicide. As a result of this attempted suicide she has been left with diminished capacity and is no longer able to work.
Will Quan’s individual disability policy pay for this disability?
No.
Individual disability policies will not pay benefits for a claim that is the result of a self-inflicted injury.
(Refer to Section 2.2.3.3)
Estelle has an individual disability insurance policy. It is an Own Occupation policy that has a benefit period up to age 65, a 90-day elimination period and a waiver of premium rider.
Estelle was in a serious car accident which left her with a broken pelvis and other serious injuries. She is not expected to return to work for at least one year.
How will Estelle pay her premiums on her individual disability insurance policy?
Estelle will have to pay the premiums for the first three months and then the waiver of premium will commence in the fourth month.
The waiver provisions void (waive) the policyholder’s obligation to pay premiums during the time that the life insured under the policy is on disability claim.
The waiver of premium benefit on a disability income policy usually begins within one to six months of disability. In other words, if the waiting period is three months, premiums will be paid by the insured for three months and no longer. Also, the premiums paid during this time may be returned if the rider is structured to do so.
(Refer to Section 2.2.3.5)
How does a return of premium rider on an individual disability insurance policy work?
- If there are no claims by age 65, when the coverage expires, 70% of all premiums paid are repaid to the policyholder;
- If claims are filed during the life of the policy but the total of benefits paid out is less than the total of premiums paid in, the difference would be paid to the policyholder when the coverage expires;
- If the total of benefits paid out over the life of the policy exceeds the total of premiums paid in, no return of premiums is payable.
(Refer to Section 2.2.4.7)
What are the most common benefit periods available in an individual disability insurance policy?
Two years, five years, ten years, or up to age 65.
(Refer to Section 2.2.2.3)
Linda is a 36-year-old doctor who runs a private practice. Her annual income is $180,000. Linda inherited some rental income properties when her parents died a few years ago. The properties generate $40,000 per year of income. She also earns $12,000 a year in income from a trust account that was set up for her by her parents.
Linda has decided to purchase an individual disability insurance policy. If Linda is applying for an Own Occupation disability insurance policy with a benefit period up to age 65, waiver of premium, a 90-day elimination period and a 60% benefit amount, how much disability insurance can she acquire?
$6,400 per month.
The rental income and trust income would continue even if Linda were to become disabled. This might reduce her eligibility for disability insurance. One method to calculate the maximum benefits that Linda is eligible to receive from her individual policy is the formula: $180,000 – $40,000 – $12,000 = $128,000. At 60%, Linda could purchase $6,400 per month of monthly disability income.
(Refer to Section 6.2)
Allen is 58 years old. He is discussing critical illness insurance with his life insurance agent. Can Allen still purchase a critical illness insurance policy?
Yes.
A critical illness policy can only be purchased up to age 65.
(Refer to Section 3.1.1.1)
Joseph purchased a $250,000 critical illness policy two weeks ago. He was just diagnosed with terminal lung cancer. Will the insurer pay the lump-sum benefit to Joseph?
No.
For the benefit to be payable, the diagnosis or first manifestation of the condition, or disease, must occur more than 30 days after the issue date of the policy (the qualification period).
(Refer to Section 3.1.5)
Melanie has a disability insurance policy which she purchased a few years ago. To fill in the gaps in insurance, her agent recommends that she should purchase a long-term care insurance policy. Melanie is concerned about an overlap in benefits between the two types of coverage. What should the agent tell her?
There is really no risk of overlap or duplication in benefits between the two types of coverage because disability insurance replaces lost income and does not provide cash specifically to cover the expenses of the disabled insured; however, long-term care coverage covers medical and related expenses but provides nothing in the way of income replacement for the afflicted.
(Refer to Section 3.4.1)
Simon and Chin started a company six years ago. They are equal shareholders. It is a very successful company. Simon is in charge of marketing and sales and Chin runs the manufacturing side of the company. They are both vital to the ongoing success of the business.
They have a buy-sell agreement in place. They have provided two years of financial statements of the company to an insurance company. They have purchased life insurance on each of their lives so that there would be money available to buy the shares of the deceased shareholder.
What product should they consider purchasing to deal with the ramifications of one of the shareholders becoming disabled?
Disability buyout insurance.
If an owner/partner/shareholder is disabled, his or her share is purchased from the disabled owner/partner/shareholder with disability buy-out insurance, according to the terms of the buy-sell agreement.
(Refer to Section 5.4.2)
What is the term used to refer to a definition of “disability” in an individual disability income policy that covers the loss of limbs, sight, hearing or speech?
Presumptive disability.
(Refer to Section 2.2.2.8)
Timothy is a self-employed computer programmer. He shares office space with two other computer programmers. Each individual is responsible for their share of the expenses for the office. Timothy is concerned about how a disability would impact his income.
What type of disability insurance should Timothy purchase?
Individual disability insurance and business overhead expense insurance.
In the case of disability, the individual disability insurance would address Timothy’s income loss and the business overhead insurance would address his ongoing business operating costs.
(Refer to Sections 2.1.1, 5.3.1)
An insurance agent sold an individual disability insurance policy to Lisa, which allows her to increase the amount of her monthly disability benefit without having to provide medical evidence.
What kind of optional benefit did Lisa purchase?
Future purchase option.
The future purchase option (FPO) allows the policy owner to increase the amount of monthly income benefit to keep pace with his or her growing income, with no evidence of medical insurability. The premium will increase in step with the increase in coverage. Income will have to be proven when this option is used.
(Refer to Section 2.2.4.3)
