The correct answer is “annual earnings.” When underwriting a disability income policy, insurance companies consider a variety of factors to determine the coverage and premium rates. Annual earnings are a crucial determinant in this process for several reasons.

Why “Annual Earnings” is the Correct Answer:

1. Financial Risk Assessment:

The primary purpose of a disability income insurance policy is to replace a portion of an individual’s income in the event they become disabled and are unable to work.

Therefore, the insured’s annual earnings serve as a fundamental benchmark for assessing the financial risk involved. It is the basis for calculating the amount of disability income coverage required. The higher an individual’s annual earnings, the greater the potential loss in the event of a disability, and thus, the higher the coverage amount needed.

2. Premium Calculation:

The premium for a disability income policy is typically based on the coverage amount, among other factors. Higher coverage amounts lead to higher premiums. The annual earnings of the insured play a crucial role in determining the appropriate level of coverage and, consequently, the premium.

Insurers use a percentage of the insured’s earnings to determine the benefit amount, and this percentage can vary based on the policy and the individual’s occupation.

3. Occupational Risk:

Different occupations carry varying levels of risk for disability. Some jobs involve a higher likelihood of injury or illness, increasing the chances of disability. However, annual earnings also correlate with occupation.

Individuals in higher-paying professions may be more exposed to high-stress environments or longer working hours, which can impact their risk of disability. Therefore, the assessment of annual earnings helps insurance companies consider the combination of occupation and income in risk evaluation.

4. Benefit Period:

Disability income policies typically specify a benefit period, which determines how long the insured will receive benefits if disabled. The choice of benefit period often relates to annual earnings. People with higher earnings may choose longer benefit periods to ensure continued financial security in the event of long-term disability. This decision has an impact on policy terms and premium rates.

Now, let’s explore why the other options are not correct:

b) Sex of the Insured:

It is generally considered discriminatory and unlawful to use the sex of the insured as a primary factor in underwriting a disability income policy. Insurance companies have moved away from gender-based underwriting due to concerns of gender discrimination.

Underwriting decisions are typically based on actuarial and statistical data, as well as factors directly related to the individual’s health, occupation, and lifestyle. Gender is not a valid determinant of disability risk.

c) Marital Status:

Marital status is also not a direct factor in underwriting a disability income policy. Insurance underwriting primarily focuses on factors that affect an individual’s risk of disability, such as health, occupation, and lifestyle. While marital status may influence an individual’s financial needs, it is not a significant factor in assessing the risk of disability itself.

d) Occupation:

Occupation is a relevant factor in underwriting disability income policies, but it is not the most commonly used factor. The risk associated with various occupations varies, and insurance companies do consider the nature of an insured’s job when determining policy terms and premiums.

However, annual earnings tend to be a more direct and quantifiable measure of an individual’s financial exposure in the event of a disability, making it the primary factor. Occupation is often used in combination with annual earnings to provide a more comprehensive assessment of risk.

In summary, annual earnings are the most commonly used factor when underwriting a disability income policy because they directly relate to an individual’s financial risk in the event of disability, influence coverage amounts, and impact premium rates.

While other factors like occupation and health play important roles in underwriting, they are typically considered in conjunction with annual earnings to provide a holistic evaluation of an individual’s risk profile. Factors such as sex and marital status are generally not used as primary underwriting criteria due to concerns about discrimination and relevance to disability risk assessment.