CLU Disability Income Insurance 2 â Questions and Answers
Question 1: Occupation classes in disability income underwriting are primarily used to:
- Determine the geographic territory where coverage applies
- Set the maximum benefit period available to the insured
- Reflect the relative risk and physical demands of various occupations for rating and policy terms (Correct answer)
- Establish the waiting period before initial claims can be filed
Correct answer: Reflect the relative risk and physical demands of various occupations for rating and policy terms
Insurers assign occupations to classes based on injury risk, physical demands, and historical loss experience, which directly determines premium rates, available benefit periods, and policy definitions offered.
Question 2: A 'presumptive disability' clause in a disability income policy typically provides:
- A reduced benefit for conditions presumed to be pre-existing at policy issue
- Immediate full disability benefitsâwaiving the elimination periodâfor specified catastrophic losses such as total loss of sight, speech, hearing, or two limbs (Correct answer)
- A benefit calculation presuming the insured will eventually recover and return to work
- Coverage limited only to disabilities presumed to be permanent at onset
Correct answer: Immediate full disability benefitsâwaiving the elimination periodâfor specified catastrophic losses such as total loss of sight, speech, hearing, or two limbs
The presumptive disability provision grants immediate full benefits without requiring the insured to satisfy the elimination period for severe, objectively verifiable losses such as loss of both hands, both feet, sight, speech, or hearing.
Question 3: The 'recurrent disability' provision in a disability income policy is designed to address a situation where:
- The insured suffers two different, unrelated disabilities at the same time
- A subsequent disability from a completely unrelated cause begins after full recovery
- The insured returns to work but becomes disabled again from the same or related cause within a specified period, allowing the new period to be treated as a continuation of the original claim (Correct answer)
- Benefits automatically recur every year the insured remains totally disabled
Correct answer: The insured returns to work but becomes disabled again from the same or related cause within a specified period, allowing the new period to be treated as a continuation of the original claim
The recurrent disability provision prevents the insured from having to re-satisfy a new elimination period if they return to work briefly but then become disabled again from the same or related cause within the policy's recurrence period, commonly three to six months.
Question 4: In a group long-term disability plan where the employer pays 100% of the premium, disability benefits received by an employee are:
- Income tax-free because disability payments are always excluded from gross income
- Taxable as ordinary income to the employee, since the employer's premiums were paid with pre-tax dollars (Correct answer)
- Subject to long-term capital gains tax rates
- Tax-free up to $10,000 annually regardless of how premiums were paid
Correct answer: Taxable as ordinary income to the employee, since the employer's premiums were paid with pre-tax dollars
When an employer pays LTD premiums and deducts them as a business expense, those amounts are never included in the employee's taxable income, so any benefits received by the disabled employee are fully taxable as ordinary income.
Question 5: A 'rehabilitation' provision in a disability income policy typically:
- Requires the insured to attend rehabilitation or immediately forfeit all disability benefits
- Provides continued or modified benefits to encourage and support the insured's participation in an approved vocational rehabilitation program (Correct answer)
- Reduces ongoing disability benefits dollar-for-dollar by the cost of rehabilitation services received
- Converts the disability policy into a long-term care benefit during the rehabilitation period
Correct answer: Provides continued or modified benefits to encourage and support the insured's participation in an approved vocational rehabilitation program
Rehabilitation provisions incentivize recovery by allowing the insurer to pay for approved rehabilitation programs while continuing modified disability benefits, serving the long-term interests of both the insured and the insurer.
Question 6: Which elimination period option in a disability income policy would result in the LOWEST premium for the insured?
- 30 days
- 60 days
- 90 days
- 180 days (Correct answer)
Correct answer: 180 days
A longer elimination period reduces the insurer's risk exposure by requiring the insured to self-insure for a greater initial period; insurers reward this assumption of risk with a significantly lower premium for a 180-day elimination period.
Question 7: A 'cost of living adjustment' (COLA) rider in a disability income policy is specifically designed to:
- Adjust the policy premium each year in line with the Consumer Price Index
- Increase disability benefits periodically during a claim to help offset the impact of inflation on the insured's purchasing power (Correct answer)
- Allow the insured to purchase additional coverage as salary increases, without medical underwriting
- Automatically reduce the elimination period during periods of high inflation
Correct answer: Increase disability benefits periodically during a claim to help offset the impact of inflation on the insured's purchasing power
The COLA rider increases the monthly benefit amount annually during an active claimâtypically tied to CPI or a fixed percentageâprotecting the disabled insured's purchasing power against inflation over a prolonged disability.
CLU Disability Income Insurance 2
Occupation classes in disability income underwriting are primarily used to: