The monthly benefit for an individual disability income policy is usually limited to a percentage of the insured's income to avoid what?

• A. Under-insurance
• B. Over-insurance
• C. Tax evasion
• D. Policy lapse

Answer: (B)

The benefit is capped as a percentage of what you earned to prevent over-insurance. Disability income policies are meant to replace a portion of lost income, not to pay more than the insured was earning. If benefits could exceed earnings, the insured might receive a windfall while disabled, which creates moral hazard and isn't financially sensible for the insurer or the policyholder. By tying the monthly benefit to a portion of pre-disability income, the coverage stays proportionate to actual economic loss and remains affordable for the insurer.

Under-insurance would happen if the benefit were too small, not if it's capped to a percentage. Tax evasion and policy lapse aren’t related to why the benefit is limited to a percentage of income.