Maryland Life and Health Insurance License Practice Exam

What is the purpose of managing the percentage of an individual's income covered under a disability income policy?

1. To ensure adequate saving for retirement

2. To prevent potential fraud

3. To minimize risk of insurer's loss

4. To maintain a balanced budget for the insured

The correct answer is: To minimize risk of insurer's loss

The purpose of managing the percentage of an individual's income covered under a disability income policy primarily focuses on minimizing the risk of loss for the insurer. When insurance companies set limits on the percentage of income that can be covered in a disability income policy, they aim to create a balance in risk management. If an insured individual receives benefits that fully replace their income, it could discourage them from returning to work, leading to long-term claims and increased financial burden on the insurer. By capping the income replacement at a certain percentage (often between 50% and 70%), insurers ensure that policyholders have an incentive to eventually re-enter the workforce while still receiving enough support during periods of disability. This strategic approach helps insurers manage their overall risk exposure and sustain their financial viability. Managing coverage levels not only protects the insurer’s interests but also encourages policyholders to remain engaged in employment when possible. This practice helps maintain the long-term health of disability income insurance products within the market.