Ch.15 - 2010 Reed International Books Australia Pty Limited...

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© 2011 LexisNexis Australia 1 Financial Planning in Australia 4ed – by Taylor, Juchau, Houterman Solutions by Sharon Taylor Chapter 15 INCOME PROTECTION, HEALTH AND GENERAL INSURANCE Solutions to Questions Question 1: What is the difference between the definition of ‘total disablement’ in a life and TPD policy and the same term in an income replacement policy? TPD in a life policy and TPD policy requires that the insured be totally and permanently disabled. In other words, the insured’s condition is such that they are never able to work. The income replacement policy envisages a situation where the insured is totally incapacitated, but it may not be forever. The policy will pay so long as the insured is totally disabled. Some insurers offer cover for partial disablement as well at an increased premium. This means that when the insured is starting to recover and is able to do some work, the policy will pay a reduced benefit. Question 2: An insured suffers a disability and is able to return to work on partial duties. The waiting period has been satisfied. The pre-disability income is $10,000. The policy benefit is 6000 and the post-disability income is $4000. What is the benefit payable under the policy? The formula is: x C A – B A In this case: $ x $6,000 10,000 – $4,000 = $3,600 $10,000 Question 3: The business overheads policy goes into quite an amount of detail as to how benefit is calculated. The cover is often included as a separate section of an income protection policy. Why does the insurer not just provide a policy that covers the gross income of the business? The gross income of a business can be divided into two principal areas: fixed costs and variable costs. The variable costs are those that will only be incurred where a product is sold or a service is rendered. A doctor uses medicines, bandages etc only when there are patients. If the doctor is incapacitated then those expenses will not be incurred. In addition, the doctor’s own income take from the business is protected by the income replacement section of the business. If gross income was used then the amount payable would exceed the amount the insured is out of pocket for, and to © 2011 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Reproducing or distributing any material from this website for any other purpose requires written permission from the Publisher. © 2010 Reed International Books Australia Pty Limited trading as LexisNexis. Ancillary for Financial Planning in Sustralia 4ed - Taylor, Juchau, Houterman
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© 2011 LexisNexis Australia 2 become incapacitated would be profitable. Thus, the need for the extensive definitions. Question 4:
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Ch.15 - 2010 Reed International Books Australia Pty Limited...

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