Maryland Life and Health Insurance License Practice Exam

Why is the monthly benefit for an individual disability income policy usually limited?

1. To encourage full-time employment

2. To avoid over insurance

3. To comply with state regulations

4. To support long-term care needs

The correct answer is: To avoid over insurance

The monthly benefit for an individual disability income policy is typically limited to avoid over insurance. This practice helps ensure that the policyholder does not receive more in benefits than they were earning while working. The intent is to provide financial support that replaces a portion of their income in the event of a disability, rather than to incentivize individuals to remain unemployed. By setting a cap on monthly benefits, insurers prevent situations where individuals might receive a higher income from their disability benefits than they would from working, which could disincentivize them from returning to the workforce. The measures taken to limit benefits thus protect both the insurance company from excessive claims and the integrity of the insurance system itself.