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,
John's premium is likely less than Mary's.
The elimination period is the time that must pass before benefits are paid under a disability income policy. A longer elimination period typically results in a lower premium because the insurer has a reduced risk of having to pay out benefits during that waiting time.
This choice is incorrect because a shorter elimination period, such as Mary's 60 days, generally leads to a higher premium. Insurers charge more for policies that offer benefits sooner after the onset of a disability, making Mary's premium likely higher than John's.
This statement is correct because John’s policy has a longer elimination period of six months, which reduces the insurer's risk and therefore typically results in a lower premium compared to Mary's policy with a 60-day elimination period.
This choice is incorrect as it overlooks the significant impact that the elimination period has on premiums. Since Mary has a shorter elimination period, her premium will likely be higher than John's, making it unlikely that their premiums would be the same.
This option is incorrect because both policies provide the same monthly benefit of $2,000. The difference in elimination periods does not affect the amount of the monthly benefit, only the cost of the premiums.
The elimination period plays a crucial role in determining the premiums for disability income policies. In this scenario, John's longer six-month elimination period results in a likely lower premium compared to Mary's 60-day period. Thus, while both policies provide the same monthly benefit, the cost of insuring each individual varies significantly based on the elimination period chosen.
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