Question 91

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

Insurers typically assess your past year's earned income to determine the maximum amount of disability income coverage you can purchase. This ensures that the coverage reflects your financial situation and potential earnings.

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

This option is incorrect because disability income insurers do not base coverage limits solely on what you can afford. Instead, they primarily consider your earned income to establish a fair coverage limit that aligns with your financial situation and risk profile.

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

This option is also incorrect, as insurers do not typically use unearned income, such as investment income or pensions, to set disability income coverage limits. The focus is on earned income, which more accurately reflects the individual's ability to generate income through work.

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

This option is correct because disability income insurers evaluate your earned income to determine the maximum coverage. This approach takes into account your actual working income, providing a more relevant and appropriate measure for potential disability benefits.

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

This choice is incorrect as it does not represent the standard method used by insurers to calculate coverage limits. While some policies may consider multiple factors, the primary determinant remains a percentage of earned income, making this option less relevant.

Conclusion

The correct answer is option C, as disability income insurers set coverage limits based on a percentage of your earned income from the previous year. This approach ensures that the coverage aligns with your actual income-generating capacity, unlike other options that either misinterpret the basis for coverage or focus on irrelevant income types.