Insurance Ch - 6

Question 1

If a person is covered by a private disability insurance policy, then he or she could also receive benefits from Social Security.

a. True b. False

Answer 1

TRUE

Question 2

Disabled insureds generally continue to pay premiums while they receive benefits to avoid cancellation of the policy.

a. True b. False

Answer 2

TRUE

Answer 3

• Approximately 15 percent of the world’s population lives with a disability.
• In America, 57 million, or 1-in-5, live with disabilities.
• Thirty-eight million disabled Americans, or 1-in-10, live with severe disabilities.
• As people age, the likelihood of a disability increases significantly.

Question 4

What are the 3 Sources of Disability insurance ?

Answer 4

Government
- Social security
- Workers Comp.

Employers: “paid with PRE-TAX “ so benefits are taxable when rec’d
- Sick leave
- Short term disability
- Long Term disability

Individual “ paid with POST TAX” so benefits are tax free when rec’d
- Personal Policy

Question 5

DISABILITY INCOME INSURANCE
* Provides income to the insured in the event the insured is unable to work because of ________________.

• Social Security disability does ______ provide adequate coverage.
• Definition of disability is inability to engage in any ___________________________________________________, or
  disability expected to result in death.
• Waiting period of __________ before benefits are payable

Answer 5

DISABILITY INCOME INSURANCE

• Provides income to the insured in the event the insured is unable to work because of illness or injury.
• Social Security disability does not provide adequate coverage.
• Definition of disability is inability to engage in any “substantial gainful employment for a period of 12 months of longer,” or disability expected to result in death.
• Waiting period of 5 MONTHS before benefits are payable

Question 6

AMOUNT OF COVERAGE

Premiums for individual disability policies are ____________ ?

Answer 6

AMOUNT OF COVERAGE

Generally 60 - 70% of Gross income

Premiums NOT tax deductible,

but BENEFITS = tax free

Question 7

Terms of coverage

Answer 7

Short term
- Between 0 - 2 years
- 5 to 30 day elimination period (the period an insured must wait before receiving benefits).

Long Term
- Beyond 2 years
- Policy terms can range: 2 years, 5 years, or until age 65

Question 8

DISABILITY INSURANCE UNDERWRITING
* Underwriting factors include: ???

• Occupation classification considers not just job title, but the types _______________________________________________ the insured engages in and the amount of time spent with each activity.

Answer 8

DISABILITY INSURANCE UNDERWRITING
* Underwriting factors include:
Age
Gender
Occupational classification
Earnings history
Medical history
Personal habits
Lifestyle

• Occupation classification considers not just job title, but the types of activities the insured engages in and the amount of time spent with each activity.

Question 9

DISABILITY INSURANCE CHARACTERISTICS

• The financial planner will need to work with the client to structure the policy to fit the client’s ______ while still providing adequate protection.
• Policy characteristics to consider include: ??

Answer 9

DISABILITY INSURANCE CHARACTERISTICS

• The financial planner will need to work with the client to structure the policy to fit the client’s budget while still providing adequate protection.
• Policy characteristics to include:
  Whether the policy covers both - ACCIDENT AND ILLNESS
  The definition of disability
  The elimination period - “ DEDUCTIBLE “
  The benefit period
  Other policy provisions

Question 10

Disability definitions :

Own occupation

Any Occupation

Split Definition

Answer 10

DISABILITY INSURANCE DEFINITIONS

OWN Occupation____$$$_________________
* Considered disabled if insured cannot perform the duties of his “Own Occupation”
* More expensive, ideal for specialized, high paying fields

ANY Occupation____$___________________
* Considered disabled if insured cannot perform the duties of “Any Occupation” for which educated, experienced, or trained
* Less expensive premium

SPLIT Definition___$$____________________
* Own occupation for a fixed period of years (e.g., 5) then any
occupation . “ PAY LIKE OWN OCCUPATION FOR 5 YRS, THEN GOES TO “ANY OCCUPATION”

Question 11

DISABILITY INSURANCE ELIMINATION PERIOD

• Represents ?

Answer 11

DISABILITY INSURANCE ELIMINATION PERIOD

• Represents the amount of time an insured must be disabled to
  begin receiving payments under the policy.
• Elimination period - is the DEDUCTIBLE .
• Longer elimination results in LOWER PREMIUMS .

Question 12

DISABILITY INSURANCE BENEFIT PERIOD

Benefit Period ?

Answer 12

DISABILITY INSURANCE BENEFIT PERIOD

Benefit Period

• The period of time benefits continue to be paid while the insured is
  disabled.
  -The longer the benefit period, the higher the premium.
• Short-term disability policies have shorter elimination periods and
  benefit periods up to 2 years.
• Long-term disability policies have longer elimination periods and
  provide benefits for anywhere from 2 years to lifetime.
  -To age 65 is a common benefit period

Question 13

DISABILITY INSURANCE: PROVISIONS AND RIDERS (1 OF 3)

Waiver of Premium ?

Social Security Rider ?

Answer 13

DISABILITY INSURANCE: PROVISIONS AND RIDERS (1 OF 3)

Waiver of Premium__________________________________________
* Premium waived upon disability.
* Waiver of premium can be for policy’s life following a specified
elimination period.

Social Security Rider____“TO LOWER THE PREMIUMS”________
* If the insured qualifies for Social Security disability income, the
disability payments from the insurance company are reduced by
the amount paid by Social Security.

Question 14

DISABILITY INSURANCE: PROVISIONS AND
RIDERS (2 OF 3)

Residual Benefits ?

Cost of Living Adjustment (COLA) Rider ?

Answer 14

DISABILITY INSURANCE: PROVISIONS AND RIDERS (2 OF 3)

Residual Benefits____________________________
* If insured goes back to work at reduced pay, the policy will pay a
percentage of the difference between current income and income
prior to disability.
- Some policies pay an amount equal to the percentage
reduction in income x the maximum total disability benefit.

Cost of Living Adjustment (COLA) Rider______________
* Benefits increase based on changes in the consumer price index
(CPI).

Question 15

DISABILITY INSURANCE: PROVISIONS AND
RIDERS (3 OF 3)

Future Increase Rider__________________

Automatic Increase Rider_____________

Answer 15

DISABILITY INSURANCE: PROVISIONS AND RIDERS (3 OF 3)

Future Increase Rider__________________
* Permits the insured to increase the monthly benefit as the
insured gets older, and income increases.

Automatic Increase Rider_______________
* Automatically increases the monthly benefits by a stated
percentage every year.

Question 16

DISABILITY INSURANCE: COMMON EXCLUSIONS
* Common exclusions include: ?

Answer 16

DISABILITY INSURANCE: COMMON EXCLUSIONS

 War
 Self-inflicted injuries
 Work-related injuries
 Criminal activities
 Driving a vehicle while intoxicated
 Pre-existing conditions

Question 17

GROUP DISABILITY INSURANCE
* Can be provided on a _____________________ basis, and in many
cases both short-term and long-term policies are provided.

• One advantage is that premiums are typically much lower than the
  premiums on individual coverage.
• Employers may pay for the premiums for the employees or may
  permit the employees to pay for the coverage via payroll deduction.
• Discrimination is ______________; therefore, the Summary Plan
  Description (SPD) must be consulted to determine the benefits
  available for the particular client.

Answer 17

GROUP DISABILITY INSURANCE
* Can be provided on a short-term or long-term basis, and in many
cases both short-term and long-term policies are provided.

• One advantage is that premiums are typically much lower than the
  premiums on individual coverage.
• Employers may pay for the premiums for the employees or may
  permit the employees to pay for the coverage via payroll deduction.
• Discrimination is permitted; therefore, the Summary Plan
  Description (SPD) must be consulted to determine the benefits
  available for the particular client.

Question 18

GROUP DISABILITY INSURANCE:

SOCIAL SECURITY OFFSET

• To avoid providing employees with benefits that exceed their usual
  earnings, employers usually _____________________________________ with benefits and income from other sources.
• Group disability benefits may be reduced in part or in full _________________________

Answer 18

GROUP DISABILITY INSURANCE:

SOCIAL SECURITY OFFSET

• To avoid providing employees with benefits that exceed their usual
  earnings, employers usually integrate long-term disability income
  benefits with benefits and income from other sources.
• Group disability benefits may be reduced in part or in full by
  Social Security benefits

Question 19

TAXATION OF GROUP DISABILITY INSURANCE
PAYMENTS

• Premiums paid by the insured with after-tax dollars
  Benefits received under the policy will ______ subject to income tax.
• Premiums paid by the insured with pre-tax dollars or premiums were paid by an employer.
  Benefits provided under a policy ________t to income tax.
• Employer and employee share the cost of coverage (and the
  employee pays with after-tax dollars).
  Benefits are __________________________________________pro rata).
• Special tax treatment for equity partners in partnerships, and greater than 2% shareholders in Sub-Chapter S Corporations.

Answer 19

TAXATION OF GROUP DISABILITY INSURANCE
PAYMENTS

• Premiums paid by the insured with AFTER TAX money ,
  Benefits received under the policy will be TAX FREE.
• Premiums paid by the insured with PRE-TAX dollars or premiums were paid by an employer.
  Benefits provided under a policy will be TAXABLE
• Employer and employee share the cost of coverage (and the
  employee pays with after-tax dollars).
  Benefits are partially taxable and partially tax-free (pro rata).
• Special tax treatment for equity partners in partnerships, and greater than 2% shareholders in Sub-Chapter S Corporations.

Question 20

DISABILITY INSURANCE SUMMARY
CHARACTERISTIC DESIRABLE COVERAGE

Amount of Benefit
Benefit
Covered Causes of Disability
Elimination Period Depends
Definition of Disability
Renewability
Integration w/ Social Security =

Answer 20

DISABILITY INSURANCE SUMMARY
CHARACTERISTIC DESIRABLE COVERAGE

Amount of Benefit = 60-70% of gross pay
Benefit = Term Work Life Expectancy
Covered Causes of Disability = Injury & Sickness
Elimination Period Depends = on Emergency Fund
Definition of Disability = “ Own Occupation”- the best
Renewability = Non-cancelable or guaranteed renewable
Integration w/ Social Security = May be desirable to reduce premiums

Question 21

Any Occupation - Type of disability insurance policy that ?

Answer 21

Any Occupation -

Type of disability insurance policy that provides benefits to a policyowner if he or she is unable to perform the duties of any occupation for which he or she is suited by education, training, or experience.

Question 22

Automatic Increase Rider - A provision that ??

Answer 22

Automatic Increase Rider

A provision that automatically increases the monthly benefit by a stated percentage each year.

Question 23

COLA Rider - Provides a cost of living adjustment to benefit payments based on increases ________________?

Answer 23

COLA Rider

• Provides a cost of living adjustment to benefit payments based on increases in inflation.

Question 24

Future Increase Option Rider - A provision that permits ??

Answer 24

Future Increase Option Rider

• A provision that permits the insured to increase benefit coverage as they get older.

Question 25

Guaranteed Renewable - A provision that requires the insurance company to ???

Answer 25

Guaranteed Renewable -

Provision that requires the insurance company to renew the policy for a specified period of time or until the insured attains a certain age.

• Premium may be increased on a class basis

Question 26

Non-Cancelable - A provision that??

Answer 26

Non-Cancelable

• Provision prevents the insurance company from canceling the policy for ANY REASON provided the policy premium is paid

-DO NOT permit increases in premium

Question 27

Own Occupation - Type of disability insurance policy that provides benefits to a policyholder if he is unable to perform the duties of ????

Answer 27

Own Occupation

• Type of disability insurance policy that provides benefits to a policyholder if he is unable to perform the duties of their occupation. This type of policy is more expensive than an any occupation policy.

Question 28

Partial Disability - A provision that provides payments that are _________________________________?

Answer 28

Partial Disability

• A provision that provides payments that are less than those paid for a total disability.
• inability to perform at least one important duty of the insured’s normal occupation.
• Provides payments that are less than those paid for total disability (usually 50%) but these benefits usually last for only a short period of time (such as six months), and may only be available following a period of total disability (some policies do not have this requirement)

Question 29

Presumptive Total Disability Coverage

• A provision that automatically considers certain conditions to be __________________________________________________________?

Answer 29

Presumptive Total Disability Coverage -

A provision that automatically considers certain conditions to be totally disabling, such as loss of sight in both eyes, hearing in both ears, the use of both hands, the use of both feet, or the use of one foot and one hand.

Question 30

Residual Benefits Provision - A provision that will provide?

Answer 30

Residual Benefits Provision TEST

• Provides continuing benefits for an insured who returns to work but suffers a reduction of income due to a disability.

-Insurance companies typically use two approaches to determine eligibility for residual benefits:
(1) the loss of earnings method or
(2) the loss of time or duties method

• Measured by the ratio of a person’s reduction in earnings after recovery from total disability to his or her earnings before disability.
• Often permanent; therefore, benefits may continue for the maximum benefit period of the basic coverage – perhaps for the insured’s lifetime

Question 31

Split Definition - Type of disability policy where an insured is covered against the risk of _____________________________?

Answer 31

Split Definition -

Type of disability policy where an insured is covered against the risk of not performing his or her own occupation for a period of time, and after that period expires, an any-occupation definition of disability is used.

Question 32

Group Disbaility INsurance ?

Answer 32

• Less expensive
• usually not portable, when you leave
• Employers pay pay premiums
• Consult Summary plan descriptions for disability info

Question 33

SA “defines disability as the ?

Answer 33

SA “defines disability as the::

• inability to engage in any substantial gainful activity (SGA) by reason of any medically determinable physical or mental impairment(s) which can be expected to result in death or
  -which has lasted or can be expected to last for a continuous period of not less than 12 months.”
• five-month waiting period before benefits can begin

Question 34

The three standard definitions in terms of occupation are: ??

Answer 34

3 standard definitions in terms of occupation are:

1. own-occupation policies
2. any-occupation policies
3. split (hybrid) definition policies

Question 35

split definition (hybrid) of disability.

Under a split definition policy, an insured will be covered ??

Answer 35

SPLIT DEFINITION (hybrid) of disability.

• Most Group policies use this.

-Covered against the risk of not being able to perform his or her own occupation for a period of time and, after that period expires, an any-occupation definition of disability would be used.

-Gives insured TIME to adjust to his or her new reality and perhaps obtain the training necessary to perform other occupations that will allow him/ her to replace some or all of the lost income from the old occupation.

Question 36

PRESUMPTIVE TOTAL DISABILITY

Answer 36

PRESUMPTIVE TOTAL DISABILITY coverage,

Considers certain conditions to be totally disabling.

• loss of sight in both eyes
• loss of hearing in both ears
• loss of the use of both hands
• loss of the use of both feet
• loss of the use of one foot and one hand

If any of these conditions arise, the policy automatically presumes total disability and will begin payments

Question 37

Waiver of Premium ?

What happens after elimination period and the insured is receiving benefits ?

Does the insured pay premiums while in the elimination period ?

If the insured regains his or her health and returns to work, the premiums on the policy must _______________________________________ in order to keep the policy in force

Answer 37

Waiver of Premium Rider

Waive future premium payments under the policy once the elimination period has been met and the insured is receiving disability benefits under the policy.

The insured must continue to pay the premiums during the elimination period, but once the elimination period has passed the waiver is often retroactive to the start of disability and premiums paid during the elimination are refunded.

If the insured regains his or her health and returns to work, the premiums on the policy must be paid
in order to keep the policy in force

This rider is standard in most disability policies and may not increase the cost of the policy

Question 38

Recurrent Disability Provision

Answer 38

Recurrent Disability Provision

• differentiate between two separate disabilities and a continuation of the same disability.

-, if the two losses constitute two separate disabilities, two elimination periods and two benefit maximums are applicable, whereas if the two losses are deemed to be one disability, only one waiting period and one benefit maximum apply.

-The typical recurrent disability clause specifies that if, within six months of a total disability, the insured sustains a subsequent period of disability from the same or a related cause, the second disability will be deemed a continuation of the first one. Otherwise, it will be deemed a new disability, regardless of the cause.

Question 39

Change of Occupation Provision

Answer 39

Change of Occupation Provision

-Change of occupation provision permits the insurer to reduce the benefit payable in the event the insured changes to a more hazardous occupation.

-Benefit is reduced to the amount the premium paid would have purchased at the more hazardous employment classification.

-If the insured changes to a less hazardous occupation, the premium is reduced, but the benefit typically remains the same.

Question 40

Social Insurance Substitute Benefit, Social Security Rider, or Social Insurance Rider

Answer 40

Social Insurance Substitute Benefit, Social Security Rider, or Social Insurance Rider

• Referred to as an SIS benefit, effectively integrates the maximum disability benefit with Social Security
• Provide benefits to disabled individual while an application for SS benefits is pending

-Rider can replace benefits that are not paid when a Social Security claim is denied.

• The SIS rider provides for higher benefits during the first year of a disability while the insured is waiting for benefits from Social Security
• The rider, which increases the cost of the policy, can be structured as an “all or nothing” benefit or as “an offset” benefit.
  • With an all or nothing rider, the benefit will be paid if Social
    Security does not pay and will not pay if Social Security does pay.
  • With an offset rider, the benefits are reduced to the extent of
    benefits received from Social Security.

Question 41

incontestability Clause

Answer 41

INCONTESTABILITY CLAUSE

Prevents the insurer from voiding the contract after the specified period of time (generally two years).

Protects the insured from several potential issues, including preexisting conditions, misstatements or misrepresentations, and unknown conditions. T

Question 42

The probationary period is the period of time after??

Answer 42

The probationary period

• Period of time after issuance of a disability insurance policy, usually 15-30 days, during which there is NO coverage for disabilities DUE TO SICKNESS
• Provision will deny coverage for a sickness that was in the incubation stage when the policy was issued.
• Proteect insurance company from paying for preexisting conditions. Note that coverage still applies during the first few days for any bodily injuries arising out of accidents.

Question 43

social security back PAY

Answer 43

-The appeals and hearing process often takes one to two years to complete, but for those who eventually do get approved, the benefits are paid retroactively to the 6th month of disability.

• This creates a lump sum payment for past-due benefits, commonly referred to as “backpay.”

-If Social Security disability benefits are delayed, a long-term disability plan pays full benefits up until the point where the Social Security Administration approves the application

Question 44

Social Security Disability

The following points are important to review with the client when considering disability income protection:

Answer 44

Social Security Disability
The following points are important to review with the client when considering disability income protection:

• Rules for qualifying for Social Security disability benefits are STRICT.
• 5 month waiting period before benefits start.
• Projections are available at SSa.gov to evaluate potential disability income.

Question 45

Individual DI Policy Options

flexibility

PREMIUMS CAN BE ?

guaranteed renewable

Benefit periods

Elimination periods

Definition of Disability

Answer 45

Individual DI Policy Options

• Individual DI allows the client and planner the flexibility to design the policy to meet the client’s need
• Premiums for individual DI can be high for certain types of occupations, short elimination periods, long benefit periods, and high income replacements.
• Policies should be guaranteed renewable or non-cancelable (a cancelable policy can be canceled by the insurance company and is a weakness in the plan).
• Benefit periods should extend to retirement age, or as long as the client can afford to purchase.
• Elimination periods should be no longer than the period of time emergency funds will cover.
• definition of disability should be more liberal than the Social Security definition.
• Clients close to or in retirement should NOT buy additional disability income insurance and should terminate existing policies.

Question 46

Diane, an ER surgeon, buys a disability policy with a base benefit of $6000 and an SIS offset benefit of $1200. Diane becomes disabled and eventually receives $1000 in Social Security disability benefits. How much will she receive from her policy initially?

A. $4800
B $6000
C $6200
D $7200

Answer 46

SOCIAL SECURITY INTEGRATION TEST

Diane, an ER surgeon, buys a disability policy with a base benefit of $6000 and an SIS offset benefit of $1200. Diane becomes disabled and eventually receives $1000 in Social Security disability benefits. How much will she receive from her policy initially?

$4800
$6000
$6200
$7200

Solution: The correct answer is D.

Initially, she receives the full benefit. Once SS starts paying her benefit would drop to $6200.

Question 47

he amount of the premium payments is excluded from the employee’s income, regardless of whether the plan is discriminatory.
Rationale

Answer 47

The amount of the premium payments is excluded from the employee’s income, regardless of whether the plan is discriminatory.
Rationale

When group long-term disability insurance is paid for by the employer, the amount of the premium payments is excluded from the employee’s income even though the plan is discriminatory.

Question 48

Blair, an ER surgeon, buys a disability policy with a base benefit of $6,000 and an SIS offset benefit of $1,200. Blair becomes disabled and eventually receives $1,000 in Social Security disability benefits. How much will she receive from the insurance company after Social Security benefits begin?
$4,800.
$6,000.
$6,200.
$7200

Answer 48

Blair, an ER surgeon, buys a disability policy with a base benefit of $6,000 and an SIS offset benefit of $1,200. Blair becomes disabled and eventually receives $1,000 in Social Security disability benefits.

How much will she receive from the insurance company after Social Security benefits begin?

$4,800.
$6,000.
$6,200.
$7200

Rationale

Initially, the policy will pay the sum of the base benefit and the SIS benefit, which equals $7,200. After Social Security begins paying, the insurance company will only pay $6,200. The total benefit is offset by the amount received by SSA.

                                             SS starts
                                              I gets $6,000 benefit                I    gets      $6,200  plus $1,200 SS offset             I    ss pays $1,000  \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_> I \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_>
                                              I
                                              I
                                              I
                                              I

Question 49

DISABILITY INSURANCE

Answer 49

DISABILITY INSURANCE TEST

• Definitions of disability
  
  • Any Occupation-surgeon hurts hand,then teaches = NO disability
  • Modified Occ- maybe Own Occ, period , then changes to ANY -OCC
  • Own Occ- surgeon hurts hand, then teaches = GETS disability
• Social Security definition
  * Any occupation, no gainful activity, last 12 months or Death
• Social Security integration-SS disability policy integrates w/ SS disability
• Elimination period (no benefits paid) -5mns waiting for SS disability
• Residual income provision-continues benefits if goes back to work
• COLA - gives purchasing power over long period of disability, tied to CPI

Question 50

RESIDUAL BENEFIT PROVISION

Answer 50

RESIDUAL BENEFIT PROVISION

–Continuing benefits for insured who returns to work but suffers a loss of income due to the disability.

–Residual disability benefits may be included as a policy provision or may require purchase of a rider that can be added for an additional premium

2 approaches to determine eligibility for residual benefits:

(1) the loss of earnings method
Residual benefits are usually payable if the insured’s earnings loss exceeds 20 percent.

(2) the loss of time or duties method.
, if, as a result of the insured’s disability, compensation is adjusted for time away from the job, or the income is adjusted because the insured cannot perform the same duties, a residual benefit may also be available

Question 51

Burton has a disability income policy that pays $4,000 per month for total disability. Burton’s normal earnings are $6,000 per month. He is now back to work after a period of total disability, but he is able to work only on a part-time basis at a salary of $4,000 per month. In this situation, which of the following statements are correct?

1. If Burton’s disability income insurance included a partial disability benefit, he would collect $2,000 per month from it.
2. If Burton’s disability income policy included a residual disability benefit, he would collect $1,333 per month from it.
3. If Burton’s disability income policy contained a recurrent disability clause, he would collect $4,000 per month from it.

Answer 51

1 and 2.
Rationale

Statement 1 is correct because a partial disability benefit is usually 50% of the total disability benefit.

Statement 2 is correct because a residual disability benefit is a percentage of the total disability benefit that equals the percentage reduction in earnings. Burton’s earnings were reduced by 1/3, from $6,000 to $4,000, so he would collect 1/3 of the $4,000 total disability benefit.
.33 X $4,000 /MN BENEFIT = $ !,333/MN RESIDUAL BENEFIT

Statement 3 is incorrect because the recurrent disability clause has no application in this situation

Question 52

Electric Company is a small electrical supply company with 25 employees, five of whom are salaried. The company is considering adding a group long-term disability income insurance plan and would like a recommendation. The company wants a plan that will be cost-effective, will not result in additional current income taxes for employees, and will be tax-efficient for the company. Which of the following statements would be appropriate for a recommendation of a plan?

Answer 52

Cook should limit the plan to salaried employees and provide for full integration(KEEPS COST DOWN) with Social Security and workers’ compensation benefits.

Rationale
-Cook’s plan can be cost-effective if it limits the group to salaried employees and if the plan is integrated with Social Security and workers’ compensation.
-Since Cook will be paying the premiums, employees will not have additional income taxes, and Cook will be able to deduct the payments. While the benefits will be subject to income tax, the employees will not have additional taxes currently.

Option A is not correct because this definition of disability very liberal will result in higher premiums than an any occupation or split definition. Option C is incorrect because Cook will be paying the double bonus to all employees and will not be obtaining a cost-effective alternative. Option D is incorrect because the bonus plan for salaried employees will mean additional taxes for them, and the lack of integration of the group plan for unsalaried employees will not be cost-effective.

Question 53

What is the usual federal income tax treatment of the employer’s premium payments under a group long-term disability income insurance plan?

Answer 53

Premium payments are EXCLUDED FROM employee’s income, regardless of whether the plan is discriminatory.

Rationale

When group long-term disability insurance is paid for by the employer, the amount of the premium payments is excluded from the employee’s income even though the plan is discriminatory.

Question 54

Blair, an ER surgeon, buys a disability policy with a base benefit of $6,000 and an SIS offset benefit of $1,200. Blair becomes disabled and eventually receives $1,000 in Social Security disability benefits. How much will she receive from the insurance company after Social Security benefits begin?

Answer 54

$6,200.
Rationale

Initially, the policy will pay the sum of the base benefit and the SIS benefit, which equals $7,200. After Social Security begins paying, the insurance company will only pay $6,200. The total benefit is offset by the amount received by SSA

$ 6000 BASE I $6,200 DISABILITY CONTINUES
$ 1,200 OFFEST —————-> I $1,000 SS PAYS
I