Disability Income Insurance
What the exam tests
Disability Income Insurance tests the definition of disability, benefit design, taxation, and business disability coverages. Expect own-occupation versus any-occupation and residual-benefit calculations.
Core rules
- Own-occupation pays when the insured cannot perform the material duties of their own occupation; any-occupation pays only when unable to perform any occupation for which reasonably suited. Many policies use own-occupation for a limited period, then any-occupation.
- Benefit amount is usually 60%–70% of income. Elimination period, benefit period, residual or partial disability, cost-of-living adjustment, future-increase rider, and waiver of premium shape the contract.
- Taxation follows premium payment: employer-paid premiums with pre-tax dollars produce taxable benefits; individually paid premiums produce generally tax-free benefits.
- Group LTD often integrates with Social Security and other income, reducing the payable benefit.
- Business coverages include business overhead expense and disability buy-out.
Worked example
A physician earns $20,000 monthly and buys a $10,000 monthly own-occupation policy with a 90-day elimination period. After 24 months, the physician returns part-time earning $6,000. Lost income is $14,000, or 70% of prior income. A proportional residual benefit pays 70% × $10,000 = $7,000 monthly. If the employer had paid the premium, that benefit would generally be taxable.
Traps that cost marks
Own-occupation may not last to the end of the benefit period. Do not assume all disability benefits are tax-free. Social Security offsets can reduce group benefits. Partial disability and residual disability are not identical.