Own-Occupation Disability Insurance
by Gary Fegan
I have been in the business for over 20 years and have seen and heard more than most about good and bad DI policies and companies. My goal is to help the consumer understand the importance and benefit of making sure that they are covered with an extremely important feature that should be, but is not always, in a disability insurance policy - The True Own Occupation definition of disability.
A disability insurance policy is a crucial piece to helping anyone protect his or her ability to earn an income. Nearly 3 in 10 working adults will suffer an accident or illness of 90 days or longer at some point during their career.1 A true Own-Occupation policy can help professionals protect the significant investment they made in their education and training. It can provide a benefit when you are unable, due to injury or sickness, to perform the material and substantial duties of your own occupation.
Yet you still have the flexibility to work in another occupation without having that decision impact your policy benefits. This is such an important feature for a highly skilled, highly motivated and driven professional who is likely to seek fulfilling work in some other capacity. Whether you are an executive, doctor or attorney, there is no doubt that such a provision would be important to have.
Most highly successful and driven people that I know would never want to sit around the house and sulk in the event of a disability. They would want to get back out there and do something- even in some other line of work. The True Own-Occupation feature will allow them to do just that and not take anything away from them for doing so!
A policy that does not offer a true own-occupation level of protection will not offer the same level of security that helps reduce financial stress to the policyholder. Any person with a high level of training or skills may be deemed able to work in another occupation according to the insurance company, depending on the severity of impairment of the insured. With a policy that does not offer true own occupation, the person may have their benefits reduced if they do go to work in some other role when they are disabled. The disability policy will specifically state under what terms and conditions a benefit will be paid out to a disabled policyholder.
If the policy does not specifically state that it is an own-occupation policy, it is almost certainly not. A policy with this provision is usually a little more expensive, but its importance is certainly worth the cost.
The following is an ideal definition of True Own Occupation:
A total disability means that solely due to injury or sickness you are unable to perform the substantial and material duties of your regular occupation. You will be deemed to be totally disabled even if you are gainfully employed in any other occupation, as long as you are unable to work in your regular occupation due solely to an injury or sickness. Your occupation means the occupation in which you are gainfully employed during the 12 months prior to the time you become disabled.
If you have limited your occupation to the performance of the material and substantial duties of a single medical specialty or to a single dental specialty, that specialty would be considered your regular occupation. This is vitally important, because this enables you to continue to practice medicine if you want- you would need to simply modify the field that you practice. For example, a surgeon may consider working as a general practitioner, if disabled as a surgeon, and still be able to receive his or her disability benefits.
More than any other occupations, physicians and dentists need a true own-occupation disability insurance policy, especially if you have narrowed the scope of your practice to a specialty or sub-specialty. Physicians have invested a large amount of time, money and effort into education and training to be able to work in their field. A long term illness or injury may prevent a physician from working in their specific area of medicine forever.
Most professionals want to continue working if at all possible. If they desire to work in another occupation, such as working as a professor, another area of medicine, or any other occupation, this feature will allow them to do so.
Understanding the definition of total disability is the single most important element of the policy and no two forms of coverage are alike. Consequently, I have outlined a clear breakdown of the most common forms of definitions found in today’s marketplace. I have ranked the most preferable versions first - the less desirable last. The more comprehensive the definition, the more expensive the policy will be.
Selecting which definition will provide the right fit comes down to an analysis of what the individual’s level of risk tolerance. All of these plans are generally subject to change so it is always recommended to talk with a financial professional who works within the disability insurance industry.
There are two general versions of “own occupation” disability:
1. “Own-Occupation” - because of injury or illness you are unable to perform the material and substantial duties of your regular occupation and you are not gainfully employed in another occupation.
2. “Own-Occupation” - because of injury or illness you are unable to perform the material and substantial duties of your regular occupation.
As one reads the above definitions, it appears that both claim to have an “own-occupation” definition of total disability. They both do but there are dramatic differences in how each could and would potential pay a claim in the event that an individual becomes disabled. The first definition does pay a claim if you could no longer work in your regular occupation. However, benefits would be reduced or discontinued if you chose to work in any another occupation.
In the second definition (the better “true own-occupation definition”), if you choose to go to work in any another occupation, the policy would not reduce your disability benefits.
Both policies use the same term “own-occupation” being proposed to the client, but they have two totally different definitions and restrictions. The second policy is known in the insurance industry as a true “own-occupation” policy. It is the latter that you want to make sure you have in your policy.
Let’s dig in further to get a sense for the various “own occupation definitions” that are available from the various disability insurance carriers:
This definition is the most favorable to the policy owner and is generally only available within select individual plans and rarely found within employer group plans.
The language above means a person who cannot work in their specific occupation due to an injury or illness would be eligible to receive a benefit if they cannot work in their specific job. For physicians and dentists, there are some contracts that will specify the recognition of their specialty as the occupation definition. What separates this definition from many own occupation definitions found in group plans is the ability to continue receiving benefits if the insured wants to earn an income in another profession. There is no limit as well on the additional income earned in that new profession to offset benefits as long as the insured does not work in their initial occupation.
A basic example of how this definition would work is illustrated in this hypothetical example. A 35-year-old Orthopedic Surgeon permanently injures his operating hand and can no longer perform his duties as a surgeon because of the injury suffered. He begins to receive benefits as a totally disabled individual under his policy of $10,000 a month. While he receives benefits - he decides to go to law school and change his profession to be an attorney.
He starts working as an attorney and earns a salary of $100,000 annually. Since his/her policy has a true own occupation definition of disability, he will still be eligible to receive his annual disability benefits of $120,000 in addition to his new salary of $100,000 for as long as he remains totally disabled and unable to return to work as a surgeon or until the end of the contract benefit period, whichever occurs first.
The medical and dental professions benefit greatly from this specific DOD since their training and specific skills are so important to their ability to work within that specialty. They are generally the most appropriate group of workers to seek out this level of coverage as it relates to protecting their income. This is probably the most expensive form of coverage.
This form of own occupation definition mirrors the definition above with one important difference. In the event a person is disabled, receives benefits and starting earning additional income in a new occupation - their total new income (benefits from disability + new income) cannot exceed the total old income (original earned income). If the policyholder makes more than they did before they became disabled, their disability benefits will be reduced to align with their old salary.
Here is an example. A 42-year-old Radiologist making $400,000 in annual earned income has a permanent disability and files a claim with their insurance carrier. Their policy has a transitional own occupation definition of total disability. After meeting the requirements to receive benefits of $10,000 a month - the policy owner decides to become a marketing consultant for a multinational and earns a new salary of $300,000.
His new total income would be $420,000 (disability benefits of $120,000 + $300,000 in salary), assuming he would never be able to return to work as a radiologist. Under the terms of this DOD, the benefits of his insurance policy would be reduced by approximately $1,670 a month to offset the gain of his new income over his old salary (+$20,000 a year).
The limit on after disability earnings within a new occupation in most cases, helps reduce the premium on the policyholder slightly but still makes it a relatively expensive form of coverage choice along with true own occupation.
Certainly the most prominent form of all DOD - usually found in employer sponsored group long term disability insurance plans and low cost individual contracts. This definition provides benefits when a person cannot work in their own occupation and is totally disabled. Unlike the noted own occupation definitions above, there is no continued benefit if that individual or person under the group plan wants to work earning an income in another profession.
In other words, a person would be eligible for a check if their disability were preventing them from working in their own profession and would not force them to work in another profession if they were qualified. They could not though get another job while on claim or make any earned income - simply live off of their benefit check and remain totally disabled or return to work full time.
An example of this would be:
A structural engineer suffers a long term injury and starts receiving benefits from his employer’s group long term disability insurance plan. The group policy for all employees has a modified own occupation definition of disability which states this individual will be considered disabled because his injury prevents him/her from working in their specific occupation. It also states that individual cannot work or earn additional income to continue receiving benefits. The claimant receives his monthly benefits and continues to receive them as long as he does not return to work or start working in another profession or his benefit period expires.
This form of coverage is most commonly beneficial to large groups of office administrators or as a base coverage for company employees. Generally, most executives and other key employees with higher salaries and bonuses will participate in a separate carve out plan provided through an insurance carrier that offers a secondary level of disability coverage - usually with a true own occupation definition.
There are a number of group long term disability plans that utilize this form or definition of disability. The definition generally has two periods where the term of total disability holds different terms.
The first period - which sometimes last between the first 2 or 3 years of a disabled person’s claim is commonly modified own occupation. This If the person continues beyond that first period as a disabled person though - the contract changes its definition to what qualifies for a total disability. The second period definition alters the contract language to infer the person can only be considered disabled if that injury or illness prevents them from working in ANY occupation - not just their specific occupation.
A software engineer suffers a long term disability and starts to receive benefits under their group plan. This group plan offers an adjustable own occupation definition that states own occupation for the first 2 years of claims - after that - any gainful occupation. This engineer suffers from carpal tunnel syndrome which prevents them from working specifically as a software engineer. After those two years of receiving benefits - the insurance carrier will have the right to re-examine this claimant's injury and deem whether they are qualified and able to work in any other occupation.
If the insurance carrier believes they may not be able to work as an engineer but could work in another occupation - they will have the right to reduce or refuse additional claims.
This is the least beneficial definition to the insured and provides the greatest leverage to the insurance carrier for determining eligibility for a claim. This DOD determines that the only way the insured can receive benefits for a claim is if their injury or illness prevents them from working in any occupation - not just their specific occupation or an occupation they have the qualifications to work in. The plans that typically hold this basic definition are very inexpensive and generally focused toward blue collar workers within the fields of trucking, construction, manual labor, etc.
As an example:
A long haul driver for a multi-state trucking company suffers a long term disability and qualifies to start receiving benefits from his company’s long term disability plan. The company’s gainful occupation definition of disability outlines that the insured’s impairment must prevent them from working at all in any form in any occupation in order to continue to receive benefits. The insurance carrier will have the right to re-examine whether improvements in the insured’s health will allow them to work in another occupation to see whether additional claims are warranted.
When I speak to people all over the country about disability insurance, they know the term “own-occupation” and they know that is the policy they want.
I can say with certainty that most people do not understand the difference between a true own-occupation definition of disability and other policies that claim own- occupation (some insurance companies even have “modified own occupation definitions of disability”. If you are looking to purchase an “own-occupation” disability policy, and you want to have the ability to work in another occupation without restrictions ask your agent to show you policies with true “own-occupation” only.
As a professional, it is imperative to protect your earnings potential from a possible devastating injury - and to ensure that you are protected in your own occupation, so that an insurance company cannot force you to go into some other line of work or penalize you for working in any other occupation. Let’s look at an example: A 35-yr-old physician earns $120,000 per year and has the potential to earn $3,600,000 in total earnings by the age of 65 (without any increase in pay). This income stream could unexpectedly end if an illness or injury occurs. I would have to argue that it is of the upmost importance to insure this extremely valuable asset.