4. Mary and John both have a disability income policy providing a $2,000 monthly benefit. If Mary's policy has a 60 day elimination period and John's policy has a six month elimination period,
Answer: B
John's premium is likely less than Mary's.
Due to the longer elimination period of six months in John's disability income policy compared to Mary's 60-day elimination period, John's premium is expected to be lower. This is because longer elimination periods typically result in lower premiums, as the insurer has reduced liability during the waiting period.
A) Mary's premium is likely less than John
This option is incorrect because Mary's policy has a shorter elimination period. A shorter waiting period generally leads to higher premiums, making it unlikely for her premium to be less than John's.
B) John's premium is likely less than Mary's.
This option is correct as longer elimination periods, such as John's six-month period, usually mean lower premium costs. Insurers charge less because they anticipate they will not have to pay benefits for a longer duration, reducing their risk.
C) their premium will likely be the same.
This option is incorrect. Given the significant difference in elimination periods, it is unlikely that their premiums would be the same. The disparity in waiting times typically results in a variation in costs.
D) their monthly benefit will always be different.
This option is incorrect because both Mary and John have the same monthly benefit of $2,000. The benefit amount does not change based on the elimination period but is a fixed feature of their policies.
Conclusion
John's premium is likely lower than Mary's due to his longer six-month elimination period, which reduces the insurer's risk and consequently the premium cost. All other options fail to accurately represent the implications of the elimination periods on premium pricing, highlighting the importance of understanding policy features in making insurance decisions.