California Life and Health Insurance Practice Exam

What action could help lower the premium of a proposed disability income policy?

1. Shortening the elimination period

2. Increasing the elimination period

3. Adding a rider

4. Decreasing the coverage amount

The correct answer is: Increasing the elimination period

Increasing the elimination period in a disability income policy can help lower the premium because it involves extending the waiting time before benefits begin after a disability occurs. A longer elimination period means that the insurer is at risk for fewer claims, as the insured person would need to wait longer before receiving benefits. This reduced risk allows the insurer to offer a lower premium. Typically, a shorter elimination period increases the frequency of claims paid by the insurer, leading to higher premiums. Adding a rider may also increase coverage benefits and subsequently result in a higher premium. Decreasing the coverage amount could also contribute to lower premiums, but increasing the elimination period is a more common approach specifically related to reducing initial policy costs without altering the fundamental benefits structure.