Question 91

Disability income insurers generally limit coverage based on a percentage of your earned income from the previous year.

Disability income insurers typically set coverage limits as a percentage of your earned income from the previous year, ensuring that the benefits align with your actual income levels.

A) the amount of insurance you can afford to purchase.

This option is incorrect because coverage limits are not solely determined by an individual's financial capability to pay premiums. Instead, insurers specifically assess income levels to establish appropriate coverage amounts.

B) a percentage of your unearned income from the previous year.

This option is incorrect, as disability income insurers focus on earned income when determining coverage limits. Unearned income, such as investment income, does not provide a reliable basis for income replacement in the event of a disability.

C) a percentage of your earned income from the previous year.

This option is correct because disability income insurers typically calculate coverage limits based on a percentage of the insured's earned income from the previous year, reflecting their actual earnings and financial needs during a period of disability.

D) a factor of one and one-half × your annual salary.

This option is incorrect because insurers do not use a fixed multiplication factor of salary to determine coverage limits. Instead, they base their calculations on the actual earned income from the previous year to ensure more accurate and fair benefit levels.

Conclusion

The correct answer, option C, highlights the practice of using a percentage of earned income from the previous year to set coverage limits, which ensures that the benefits are reflective of the insured's actual financial situation. Other options fail as they either misinterpret the basis for coverage determination or focus on irrelevant income types, underscoring the importance of earned income in disability insurance.