New Jersey Life and Health State Practice Exam

How can a disability income policy limit the insured's income potential?

1. By imposing penalties on earnings

2. By utilizing benefit limits

3. By applying a waiting period

4. By restricting job opportunities

The correct answer is: By utilizing benefit limits

A disability income policy primarily focuses on providing financial support to individuals who are unable to work due to a disabling condition. One of the ways it can limit the insured's income potential is through benefit limits. These limits determine the maximum amount of income that the policy will pay out to the insured, which is often a percentage of their pre-disability earnings. For example, if an individual earns $5,000 a month and the policy has a benefit limit of 60% of their income, the maximum monthly payment they would receive while disabled would be $3,000. This means that even though they might have higher expenses or income requirements, the insurance policy restricts the payout to a certain ceiling, hence limiting their income potential during the disability period. Understanding benefit limits is crucial because it directly impacts an individual’s financial situation during their recovery or inability to work. Other options like penalties on earnings, waiting periods, or job restrictions do not effectively address how the policy itself sets a cap on the amount the insured can receive, which is a key factor in income limitation.