California Life and Health Insurance Practice Exam

The elimination period in a disability income policy serves the same purpose as?

1. A waiting period

2. A premium

3. A benefit limit

4. A deductible

The correct answer is: A deductible

The elimination period in a disability income policy is analogous to a deductible. This is because both the elimination period and a deductible require the insured to cover a certain amount of loss before the insurance company begins to provide benefits. In the case of the elimination period, there is a specified duration after a disability occurs during which no benefits are paid. This period acts as a waiting time for the policyholder before they are eligible to receive disability income payments. Similarly, with a deductible, policyholders must pay a specified amount out-of-pocket before insurance coverage kicks in for a claim. Both mechanisms are designed to share the financial responsibility between the insurer and the insured, thereby reducing moral hazard by encouraging the insured to use the policy judiciously. The other answer choices do not fulfill the same function as the elimination period: a waiting period can refer to different contexts in insurance, a premium is the cost of the insurance policy itself, and a benefit limit represents a cap on the amount payable under the policy, none of which directly parallel the concept of an elimination period.