CLU Disability Income Insurance 3

Question 1

A Business Overhead Expense (BOE) disability income policy is designed primarily to:

Accepted Answer

Pay continuing fixed business expenses such as rent, employee salaries, and utilities while the owner is disabled and unable to generate revenue

Answer

BOE policies reimburse legitimate, ongoing business overhead costs—not the owner's personal income—helping keep the business viable while the disabled owner recovers, with benefits typically limited to 12–24 months.

Question 2

A 'disability buy-sell' agreement is most commonly structured as:

Accepted Answer

A cross-purchase or entity-purchase arrangement funded with disability insurance proceeds that enable the remaining owners to buy the disabled owner's business interest

Answer

Disability buy-sell agreements use disability insurance—structured as either cross-purchase or entity plans—to fund the agreed-upon purchase price of the disabled owner's interest, providing liquidity for the disabled owner and continuity for the remaining owners.

Question 3

Under a 'key person' disability income policy, the premium payment and benefit receipt are structured as:

Accepted Answer

The employer pays the non-deductible premium and receives the disability benefit as non-taxable income to the business

Answer

Key person disability policies parallel key person life insurance: the employer pays premiums that are not tax-deductible, and disability benefits received by the business are generally not taxable income to the employer.

Question 4

An 'executive bonus' (Section 162 bonus) arrangement applied to disability income insurance works as follows:

Accepted Answer

The employer pays the disability insurance premium as a taxable bonus to the executive, who owns the individual policy personally and receives future benefits income-tax-free

Answer

Under a Section 162 executive bonus plan, the employer deducts the premium as compensation expense, the executive pays income tax on the bonus amount, and because the executive owns the policy with after-tax dollars, any disability benefits received are income-tax-free.

Question 5

Workers' compensation insurance and individual disability income insurance differ primarily in that:

Accepted Answer

Workers' compensation covers only work-related injuries and illnesses while individual disability income typically covers disability from any cause, whether occupational or not

Answer

Workers' compensation is a mandatory, employer-funded program limited strictly to work-related injuries and occupational diseases, while individual disability income insurance covers qualifying disabilities regardless of whether they occurred on or off the job.

CLU - Chartered Life Underwriter Practice Test

CLU - Chartered Life Underwriter Practice Test

CLU Disability Income Insurance 3