Course Review Questions — Disability Income Insurance

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Chapter 1 — Introduction to Disability Income Insurance

Which of the following statements is correct with respect to the probability of becoming disabled?

At most ages before normal retirement age, the likelihood of becoming disabled is greater than the likelihood of death

The likelihood of becoming disabled generally increases as an individual becomes older

At certain ages the probability of becoming disabled may be as high as four times the probability of death at that age

✓All of the above are true

Which of the following is NOT correct concerning borrowing to provide family income during a breadwinner’s disability?

The widespread use of credit cards increases the likelihood that a disabled individual may borrow during a period of disability

The likelihood of borrowing from a bank may be adversely affected by an individual’s disability

✓Borrowing during a period of disability is generally considered one of the more inexpensive and workable options for finding cash to pay family bills

Borrowing during a period of disability may turn a financial problem into a catastrophic problem

How many disabilities are likely to occur by age 65 in a group of 10 men, all of whom are age 40?

One

✓Three

Four

Five

Which of the following affect the likelihood of any individual’s becoming disabled?
I. Age II. Occupation III. Lifestyle

I & II only

I & III only

II & III only

✓I, II & III

Which of the following is/are affected by a prospective disability insurance applicant’s occupation?

The cost of disability coverage

The quality of disability coverage

✓Both a and b

Neither a nor b

Which of the following would NOT normally be considered a part of a disability insurance applicant’s lifestyle?

Smoking habits

Avocation

✓Occupation

Drinking habits

Chapter 2 — Disability Policy Definitions & Provisions

Which of the following is/are correct with respect to total disability in a traditional disability income policy?

✓Total disability is couched in terms of an insured’s inability to work

Income loss is required before total disability benefits are payable

Both a and b

Neither a nor b

Jill Whitaker was a practicing cardiac surgeon who developed a tremor in her hands and began receiving a $10,000/month disability benefit. She later closed her surgical practice and taught in a local medical school at one-half her former income. What monthly disability benefit will Jill continue to receive under a pure own occupation policy?

Zero

$2,500

$5,000

✓$10,000

What is “limited” in a limited own occupation definition of total disability?

The permitted amount of income that may be earned during a period of total disability

✓The duration of the own occupation definition

The amount of the total disability benefit

The number of times in any calendar year that the own occupation definition may be used

Which of the following definitions of total disability is the LEAST favorable to the insured?

Own occupation

✓Any occupation

Limited own occupation

Modified own occupation

In an income replacement policy whose maximum monthly benefit is $10,000, what benefit would an insured receive if his income declined from $20,000/month to $14,000 as a result of accident or sickness?

Zero

$10,000

$6,000

✓$3,000

Paul Wilson’s disability income policy with a $1,000 monthly benefit for total disability contains a residual disability benefit. As a result of illness, his monthly income reduces by 20%, but he is able to work each day and perform all of his usual duties. What is his probable benefit in the first month of his residual disability?

Zero

$250

✓$500

$1,000

Jane Hoffman has been receiving residual disability benefits. Her policy provides a monthly benefit of $5,000 for total disability; her pre-disability monthly earnings were $10,000. Last month, her earnings were $2,000. What is her residual disability benefit?

Zero

✓$5,000

$8,000

$3,000

Under which of the following benefits is there normally NO requirement for income loss?

Residual disability

✓Partial disability

Both a and b

Neither a nor b

What guarantee(s) is/are provided in disability insurance coverage that is noncancellable and guaranteed renewable?

That the insurer will not increase the premium during the specified period

That the insurer will not refuse to renew the policy during the specified period

✓Both a and b

Neither a nor b

Which of the following is NOT a renewability provision found in a disability income insurance policy?

Noncancellable & Guaranteed Renewable

Conditionally Renewable

✓Automatically Renewable

Guaranteed Renewable

Under what conditions would an insurer pay a disability income benefit for a pre-existing condition?
I. When the condition was disclosed in the application and not excluded II. When the agent accepted the pre-existing condition risk III. After the policy has been in force for two years

I & II only

✓I & III only

II & III only

I, II & III

The period of time beginning with the onset of disability describes the:

✓elimination period

benefit period

rehabilitation period

probationary period

What is the maximum benefit period that would normally apply to an insured under a disability income policy providing lifetime benefits if he became disabled from sickness at age 61?

2 years

5 years

✓Age 65

Lifetime

Which of the following are differences between the life insurance waiver of premium benefit and the disability insurance waiver of premium?
I. Disability waiver may begin after 90 days of disability II. Disability waiver of premium may be satisfied by residual disability III. Disability insurance premiums may be waived upon the earliest of the elimination period or 90 days

I & II only

I & III only

II & III only

✓I, II & III

Which of the following statements is NOT correct with respect to the non-disabling injuries benefit?

The non-disabling injuries benefit provides benefits for medical treatment within 90 days of an accident

The maximum non-disabling injuries benefit is usually 50% of the monthly total disability benefit

✓Payment of the non-disabling injuries benefit causes disability benefits to become immediately payable

Non-disabling injuries benefits are payable in lieu of disability benefits

John Peters purchased a noncancellable and guaranteed renewable disability income policy when he opened his law practice. Five years later, he became a professional racecar driver. His disability insurer’s response is likely to be:

Increase the premium for the coverage

Refuse to renew the coverage

Both a and b

✓Neither a nor b

Chapter 3 — Principal Disability Rider Benefits

Which of the following is a Social Insurance Benefit rider?

Social Insurance Substitute rider

Social Insurance Supplement rider

✓Both a and b

Neither a nor b

What type of underwriting is performed when a disability income policy is applied for under a disability Purchase Option Rider?

Medical underwriting

✓Financial underwriting

Both a and b

Neither a nor b

A COLA rider affects the benefit paid under which of the following provisions?

The total disability benefit provision

The residual disability benefit provision

✓Both a and b

Neither a nor b

Which of the following statements about a disability Cost of Living rider is INCORRECT?

Disability benefit adjustments may be based on the CPI-U

A Cost of Living rider may generally cause disability benefits to increase or decrease

✓Adjustments to the disability income insurance benefit are made immediately upon the insured’s becoming disabled

Disability benefits may not be reduced below the amount shown in the policy as a result of COLA adjustments

Why are Return of Premium riders criticized?

Its premiums are considered unnecessarily high

Premiums are returned too infrequently

✓They may inhibit the submission of claims

The provisions are too complex for many policyowners to understand

Return of Premium riders may make payments under all of the following EXCEPT:

Upon policy surrender

At the insured’s death

At the insured’s age 65

✓Upon the insured’s disability

A disability Hospital Income Rider works by:

Paying an additional benefit when the insured is hospitalized

Waiving the policy’s elimination period when the insured is hospitalized

✓Either a or b

Neither a nor b

Chapter 4 — Disability Income Underwriting

A proposed insured’s occupation class may play a role in determining all of the following EXCEPT:

The amount of benefit available

The disability premium

The maximum benefit period available

✓The minimum elimination period available

Why do insurers often refuse to sell disability income policies to applicants that work at home?

✓It is difficult to determine if someone is unable to work

Working from home presents a greater than normal hazard

The policy’s incontestable provision is affected by employment from home

Personal and business expenses are commingled, making financial underwriting less precise

Which of the following is NOT a factor in financial underwriting of disability insurance?

The insured will be financially motivated to return to work following a period of disability

✓The insured will be able to pay the premium

The insured will be overinsured

The insured will malinger

What choices are generally available to a disability insurance underwriter in the case of an applicant who is a substandard risk?
I. Reject the risk II. Increase the premium III. Exclude coverage for certain conditions

I & II only

I & III only

II & III only

✓I, II & III

Which of the following underwriting actions is generally considered the most favorable to the substandard disability income applicant?

Reject the risk

Exclude coverage

✓Increase the premium

Issue the policy with a split elimination period

Chapter 5 — Primary Sources of Disability Income Benefits

The Social Security definition of disability can be characterized as:

Pure own occupation

Modified own occupation

Limited own occupation

✓Any occupation

Which of the following are requirements for a worker to be eligible to receive Social Security disability benefits?

✓The individual must have worked in a covered occupation

The individual is currently insured

Both a and b

Neither a nor b

Which of the following is a state program providing disability income benefits?

Workers Compensation

Non-occupational Disability program

✓Both a and b

Neither a nor b

Which of the following benefits would NOT normally be provided under Workers Compensation?

Cash payments

Medical services

✓Long term care services

Hospital services

Benefit periods of 26 weeks and zero-day elimination periods are generally characteristic of:

Franchise group disability plans

✓Short-term group disability coverage

Long-term group disability coverage

Individual disability income insurance

Chapter 6 — Special Coverage Disability Insurance Policies

Which of the following is NOT normally an eligible overhead expense that is reimbursed in Overhead Expense policies?

Rent

Utilities

✓Inventory

Office supplies

Which of the following would be typical Overhead Expense benefit periods?
I. 12 months II. 24 months III. 60 months

✓I & II only

I & III only

II & III only

I, II & III

Which of the following is a typical elimination period length in a disability buyout policy?

30 days

90 days

6 months

✓24 months

How are disability buyout benefits paid?

In a lump sum

In installments

✓Either a or b

Neither a nor b

What role does an employer NOT play in a Keyperson disability policy?

Owner

✓Insured

Beneficiary

Premium payor

Chapter 7 — Taxation of Disability Coverage

Which of the following statements is/are correct with respect to the tax treatment of individually purchased disability income policies?

Premiums are not tax deductible

Benefits are received tax-free

✓Both a and b

Neither a nor b

In which of the following situations would the employer’s payment of disability income insurance policy premiums on policies owned by employees be tax deductible?

A proprietorship’s payment of premiums on the proprietor’s disability policy

A partnership’s payment of premiums on the disability policy owned by a 10% partner

An S corporation’s payment of premiums on the disability policy owned by a 15% stockholder

✓A regular corporation’s payment of premiums on the disability policy owned by its sole stockholder

Carl Walters is a non-owner employee of Williams Paint Company. In which of the following situations would Williams Paint Company’s payment of disability income insurance premiums on a policy owned by Carl be deductible to the company?

If Williams Paint Company is a regular corporation

If Williams Paint Company is a sole proprietorship

If Williams Paint Company is a partnership

✓The form of business organization is irrelevant for tax deductibility

For which of the following organizations would Disability Overhead Expense policy premiums be tax deductible?
I. Robert Wilson, M.D., a sole practitioner II. Gorman & Winslow, a law partnership III. Columbia Foods, Inc., a regular corporation

I & II only

I & III only

II & III only

✓I, II & III

Which of the following is/are correct with respect to the tax treatment of disability keyperson and buyout policies?

Premiums are tax deductible

Benefits are taxable when received

Both a and b

✓Neither a nor b

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