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

Replace the business owner's personal salary and living expenses during disability

Answer

Fund a buy-sell agreement when a business owner becomes permanently disabled

Answer

Provide group disability income coverage for all employees of a small business

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

A salary continuation plan paying the disabled owner a full salary until they reach retirement age

Answer

A group disability plan providing standardized coverage for all co-owners of the business

Answer

A key person policy that names the remaining business owners personally as beneficiaries

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

The key employee pays the premium and receives the benefit income-tax-free

Answer

The employer pays the deductible premium; the key employee receives the benefit as taxable compensation

Answer

The key employee pays the premium from a deferred compensation account; the employer receives the benefit

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

The employer purchases a non-deductible group disability plan covering only executive-class employees

Answer

The executive pays premiums from a tax-sheltered nonqualified deferred compensation account

Answer

The employer and executive split the premium cost equally, with each deducting their respective share

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 covers both occupational and non-occupational disabilities while individual DI covers only work-related injuries

Answer

Individual disability income covers only occupational injuries while workers' compensation covers all disabilities regardless of cause

Answer

Workers' compensation provides unlimited lifetime benefits while individual DI strictly limits benefits to a maximum of two years

Question 6

Insurers typically limit an individual's disability income benefit to approximately 60–80% of pre-disability earned income primarily because:

Accepted Answer

Paying 100% of pre-disability income would eliminate the financial incentive to return to work and create moral hazard

Answer

Federal law prohibits disability benefits from exceeding 80% of prior earned income

Answer

State insurance regulations mandate that disability benefits must be at least 20% less than earned income in all cases

Answer

Actuarial tables show that most disabilities resolve within six months regardless of benefit level

Question 7

An integration (offset) provision in a group long-term disability plan will typically:

Accepted Answer

Reduce the group LTD benefit by amounts received from other sources such as Social Security, workers' compensation, or individual disability policies so total benefits do not exceed the plan's maximum income replacement percentage

Answer

Increase the group LTD benefit to offset any shortfall between individual policy benefits and the plan's stated income replacement target

Answer

Require the individual disability income policy to become the primary payer in all coordination-of-benefits situations

Answer

Eliminate the individual disability income policy benefit entirely once group LTD benefits commence