Disability Income and Long-Term Care — practice questions

5.3% of the exam ≈8 real questions 11 free questions here

Disability definitions, elimination periods, benefit periods, riders, taxation, and long-term care benefit triggers and California rules: about 8 of the 150 combined questions.

Where people lose points

• Own-occupation is easier to qualify for than any-occupation.
• Employer-paid disability benefits are taxable to the employee.
• Long-term care applicants in California get a 30-day free look (10232.7).
• Residual disability pays a share of lost income.

Questions and answers, explained

All 10 questions above, with the correct answer and why it is correct. Everything here is on disability income and long-term care.

1. Before her disability Paula earned $8,000 a month. Her disability income policy provides a $5,000 monthly total disability benefit and includes a residual disability benefit. She returns to work part-time earning $4,800 a month. What residual benefit will the policy pay?

   • A$2,000Correct
   • B$2,500
   • C$3,200
   • D$5,000

   Why: A residual benefit equals the total disability benefit multiplied by the percentage of earnings lost: ($8,000 − $4,800) ÷ $8,000 = 40%, and 40% × $5,000 = $2,000. Choice C is the most tempting error — it pays the raw dollar amount of lost earnings instead of applying the loss percentage to the policy's benefit, which would let the insured recover more than the policy sold.

   Reference CA A&H objectives IV and V (Disability income; long-term care)

2. Under a contributory group disability income plan, the employer pays 60% of the premium and employees pay the remaining 40% with after-tax dollars. An employee begins receiving a $4,000 monthly disability benefit. How much of that monthly benefit is taxable income to her?

   • A$0
   • B$1,600
   • C$2,400Correct
   • D$4,000

   Why: Disability benefits are taxable in the same proportion that the employer paid the premium, so 60% of $4,000 — $2,400 — is taxable and the 40% attributable to her own after-tax contributions is received income tax-free. Choice B reverses the proportions by taxing the employee-paid share, and choice D would be correct only if the employer paid 100% of the premium.

   Reference CA A&H objectives IV and V (Disability income; long-term care)

3. A disability income policy includes a Social Insurance Supplement (SIS) rider. This rider pays a benefit

   • Aonly while the insured is also collecting Social Security disability benefits
   • Bin place of the base policy benefit at all times, whether or not the insured is disabled
   • Cwhen Social Security disability benefits are denied, delayed, or paid in a lesser amountCorrect
   • Dto the insured's employer as reimbursement for sick pay already advanced

   Why: The SIS rider exists to fill the gap created by Social Security's strict 'any occupation' definition and its five-month waiting period: it pays when the expected social insurance benefit is not received, and it typically reduces or stops once Social Security benefits actually begin. Choice A reverses the trigger — the rider is most valuable precisely when Social Security pays nothing.

   Reference CA A&H objectives IV and V (Disability income; long-term care)

4. A small-business owner becomes totally disabled. Her business overhead expense (BOE) policy would reimburse each of the following while she is disabled EXCEPT:

   • AOffice rent
   • BHer employees' salaries
   • CUtility bills for the business
   • DHer own lost personal incomeCorrect

   Why: BOE insurance reimburses the fixed operating expenses that keep the business open while the owner is disabled — rent, utilities, and employee wages — but it never replaces the owner's own income or salary. The owner needs a separate individual disability income policy for that. BOE premiums are tax-deductible as a business expense, and the benefits received are taxable.

   Reference CA A&H objectives IV and V (Disability income; long-term care)

5. An employer pays the entire premium for its group long-term disability plan and does not report the premium as taxable income to employees. An employee becomes disabled and collects $3,000 per month. How are these benefits treated for federal income tax purposes?

   • AThey are fully taxable as income to the employeeCorrect
   • BThey are entirely tax free to the employee
   • COnly the first six months of benefits are taxable
   • DThey are tax free as long as the employer deducted the premiums

   Why: When the employer pays the premiums and the employee is not taxed on them, disability benefits received are fully taxable income to the employee. Benefits are tax free only to the extent the employee paid the premium with after-tax dollars — which is why choice B is wrong here. The employer's deduction (D) does not change the taxation of the benefit to the employee.

   Reference CA A&H objectives IV and V (Disability income; long-term care)

6. Under an "any occupation" definition of total disability, an insured is considered totally disabled only when he is unable to:

   • APerform the duties of any occupation for which he is reasonably suited by education, training, and experienceCorrect
   • BPerform some, but not all, of the duties of his current occupation
   • CPerform the material duties of the occupation he held when the policy was issued
   • DEarn at least 100% of his prior income in the occupation he currently holds

   Why: The any-occupation definition looks beyond the insured's original job to any work he is reasonably suited for by education, training, and experience, which makes it harder to qualify and cheaper to insure. Choice C states the own-occupation definition. Choice D is a common misconception: an earnings shortfall alone triggers residual or partial benefits, not total disability.

   Reference CA A&H objectives IV and V (Disability income; long-term care)

7. Which loss would MOST likely qualify an insured for full disability income benefits under a presumptive disability provision, without the insured having to satisfy the policy's usual definition of total disability?

   • AA back injury that prevents the insured from lifting more than 10 pounds
   • BInability to perform two of the six activities of daily living
   • CA chronic illness diagnosis requiring ongoing outpatient treatment
   • DTotal and irrecoverable loss of sight in both eyesCorrect

   Why: Presumptive disability provisions deem the insured totally disabled upon specified catastrophic losses, typically sight in both eyes, hearing in both ears, speech, or the use of any two limbs, so benefits begin without proving inability to work and often without the elimination period. Choice B is wrong because the two-of-six ADL test is the benefit trigger for long-term care insurance, not a presumptive disability trigger.

   Reference CA A&H objectives IV and V (Disability income; long-term care)

8. Which definition of total disability is the MOST difficult for a claimant to satisfy?

   • AOwn occupation
   • BModified own occupation — own occupation for a stated period, then any occupation
   • CAny occupation for which the claimant is reasonably suited by education, training, and experience
   • DInability to engage in any substantial gainful activity, as used by Social SecurityCorrect

   Why: Ranked from most liberal to most restrictive, the definitions run own occupation, modified own occupation, any suitable occupation, and finally the Social Security standard of inability to engage in ANY substantial gainful activity because of an impairment expected to last at least 12 months or result in death. Choice C is the next strictest but still limits the comparison to occupations suited to the claimant's background, while the Social Security test does not.

   Reference CA A&H objectives IV and V (Disability income; long-term care)

9. A business overhead expense policy has a maximum monthly benefit of $9,000. During the first full month of the owner's disability, the practice incurs $6,200 of covered overhead expenses. What will the policy pay for that month?

   • A$6,200Correct
   • B$7,600
   • C$9,000
   • DNothing, because expenses did not reach the monthly maximum

   Why: Business overhead expense insurance is reimbursement (expense-incurred) coverage: it pays actual covered expenses up to the monthly maximum, so $6,200 is paid and the $2,800 difference is not. Choice C reflects the common error of treating BOE like a disability income policy, which is a valued contract paying the stated amount regardless of actual loss. Many BOE contracts do carry unused monthly amounts forward for use in later, heavier months.

   Reference CA A&H objectives IV and V (Disability income; long-term care)

10. Three shareholders fund a disability buy-sell agreement using a cross-purchase arrangement. Which statement correctly describes the policy ownership?

    • AThe corporation owns one policy on each shareholder and is the beneficiary of each policy
    • BEach shareholder owns a policy on each of the others, for a total of six policiesCorrect
    • CEach shareholder owns a policy on himself and names the corporation as the beneficiary
    • DA single blanket policy covering all three shareholders is owned by the plan trustee

    Why: In a cross-purchase plan the owners buy the disabled owner's interest personally, so each owner insures every other owner: with three shareholders that is 3 x 2 = 6 policies. Choice A describes the entity (stock redemption) approach, in which the corporation itself is the purchaser and therefore owns and is beneficiary of the policies — fewer policies are needed, but the remaining owners do not increase the cost basis of their own ownership interests.

    Reference CA A&H objectives IV and V (Disability income; long-term care)

Topics inside this domain

• California free look periods and life insurance replacement

Drill other domains

• Basic Insurance Concepts and Contract Law (17.3%)
• The Insurance Marketplace, Licensing and Ethics (9.3%)
• Life Insurance Basics, Underwriting and Claims (7.3%)
• Types of Life Policies and Group Life (8%)
• Annuities (5.3%)
• The Life Insurance Contract and Riders (9.3%)

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