FIN 604 0L1

Chapter 5 assignment
7/23/18

Multiple Choice:

1. D
2. B
3. A
4. A
5. D

Discussion Question:

1. List and define the three common definitions used in disability insurance policies
The three common definitions used in disability insurance policies are Own Occupation,
Any Occupation and Split definition. Own Occupation considered disabled if insured
cannot perform the duties of his “Own Occupation”, the insured is deemed to be disabled
and the policy will provide benefit. When an own occupation policy is issued, the
premium is high due to the risks being undertaken by the insurance company. Any
Occupation provides benefits to policyowner if he or she is unable to perform the duties
of any occupation for which educated, experiences, of trained. It has less expensive
premium. Split Definition defined as own occupation for a period of time followed by an
any occupation definition, and it is often found in group policies.

2. List and describe provisions commonly found in disability insurance policies

- Residual benefits: If insured goes back to work at reduced pay, the policy will pay the
difference between current income and income prior to disability.
- Cost of living rider:
- The future increase option rider – permits the insured to increase the monthly
benefit as the insured gets older.
- an automatic increase rider – automatically increases the monthly benefits by a
stated percentage every year.

3. Explain the relative importance of short versus long-term disability coverage

- Long term is beyond two years and the policy terms can range from 2 years, 5 years,
and until age 65 or death. Short term is less than 2 years.

7. identify the primary issue in determining whether disability benefits are taxable or tax-
free.
- if the insured paid the premiums with after-tax dollars the benefits received under the
policy will not be subject to income tax. If the benefits provided under a policy paid for
with pre-tax dollars or paid by an employer are subject to income tax.

8. what is the purpose of disability income insurance, and what are some of the various
definitions of disability.
- The purpose of disability income insurance is provides income to the insured in the
event the insured is unable to work because of illness or injury.
-1. inability to perform all duties of the insured’s own occupation. 2. inability to perform
the duties of any occupation for which the insured is reasonably fitted by education,
training, and experience. 3. inability to perform the duties of any gainful occupation.