How is the benefit amount calculated based on income?

The calculation of the benefit amount based on income primarily focuses on the policyholder's pre-disability income and the percentage of that income that is covered under the policy. The correct reasoning for choice B is that it incorporates both the pre-disability income and an adjustment for any passive income that the insured may continue to receive while disabled.

In many accident and sickness insurance policies, the benefits are structured such that they provide a certain percentage of the pre-disability income. However, to prevent individuals from receiving a total income level that exceeds what they were earning prior to their disability (which could create a disincentive to return to work), any passive income—such as rental income, investment income, or other unearned income—is deducted from the total benefit calculation. This ensures that the final benefit amount reflects a fair and accurate figure relative to the individual's previous earnings after considering other income sources.

Understanding this calculation is essential because it illustrates how benefits aim to replace lost income while recognizing that individuals may have alternative income sources that continue during their period of disability. This nuanced approach helps maintain the integrity of the disability benefit system by ensuring that benefits are reasonable and aligned with the insured's financial situation.