No disabled person wants to be cut-off from collecting their disability insurance if they have not fully recovered their health. But that can happen in the disability insurance food-chain.
For example, a Surgeon with a mangled hand does not want to be denied disability insurance payments because she is physically capable of being a medical administrator. That could happen to the Surgeon if her policy says disability means “unable to do Any Occupation”. “Any Occupation” is the worst definition for the insured person.
A step up is the definition called the “Regular Occupation” clause.
It says “Total Disability” benefits will be paid if the insured person, because of accident or sickness, is “…unable to perform the important duties of his regular occupation, is under the care of a doctor, and is not working elsewhere.” “Regular occupation” is defined as “the job or jobs being done at the onset of disability”. Under this definition, the insurer cannot deny payment if the disabled person is capable of doing a different job.
At the top of the food-chain is the “Own Occupation” policy. “Own Occupation” means a disabled person “unable to do the duties of their regular job”, receives the full insurance amount “regardless of income earned in another job”. For example, if a heart surgeon loses a hand and can’t do surgery, yet decides to become a GP, the full insurance amount would be paid, regardless of income earned as a GP. The “Own Occupation” rider generally adds another 10-20% to the premium over-and-above the basic policy with “Regular Occupation”.
What about a return to work “part-time? Many people are highly motivated to return to work, so in addition to looking at “Total Disability”, the smart disability insurance buyer will also want to include “Residual Disability”. “Residual Disability” gives a disabled person the right to go back to work and earn some income, without losing all insurance benefits. “Residual Disability” exists if a person is able to go back to their own job, or do another job, but has a “reduced income because of disability”.
Under Residual Disability, a proportionate benefit is paid, depending upon the amount of income lost because of disability. To illustrate the concept, let’s assume we have a lawyer who has employment income of $20,000 per month and has purchased a disability policy that will pay her $8500 per month if she is totally disabled.
Let’s assume she has a bad back and is in pain so can’t concentrate fully but is able to go back to work part-time. The Residual Disability clause will pay based on her “prior income”, i.e. what she was earning before she became disabled, measured against her income while working part-time.
Here are examples of Residual Disability calculations: If the lawyer’s income, as a result of the bad back, drops by 25%, to $15,000 per month, the insurance will pay her $2125 per month (tax-free); i.e. 25% of $8500.
If employment income drops by 60%, to $8000 per month, the insurance pays $5100 per month (tax-free); i.e. 60% of $8500.
The calculation is done each month and the insurance payout is adjusted accordingly.
With “Residual Disability” in the policy, there is little financial hardship under any scenario. In fact, the combination of employment income plus tax-free Residual Disability benefits, in some cases, might be higher than the Total Disability insurance amount.
Not everybody thinks paying the extra 10 to 20% premium to get “Own Occupation” is necessary. Those who think it’s NOT worth it say that if disabled, there is very little financial loss with the combination of “Regular Occupation” and “Residual Disability”, so why pay extra premium for “Own Occupation”? Also, “Own Occupation” payments apply in very few situations. For “Own Occupation” to apply, the disabled person must be doing a “different job”, not one that consists of doing some duties that were done in the previous job. (If you’re doing some of your previous duties and earning less, you’ll most likely be collecting under the Residual Disability benefits.) As well, among disability insurance claimants, it is unlikely that someone will retrain in another field. Statistics say that almost 90% of disabled people return to work in their previous occupation, in some way. Also, if you are an ongoing “Own Occupation” claim, you must from time-to-time establish that you meet the provisions, even after you’ve returned to another job.
Having said that, a disabled person with the “Own Occupation” definition on their policy is likely to have a smoother ride in the event of a claim, if the disability is going to last a long time. Adding “Own Occupation” to a “Regular Occupation with Residual Disability” policy will likely be an ongoing debate as long as these options are offered to disability insurance buyers.
PLEASE NOTE: The above are general descriptions for information purposes, and do not apply to a particular insurance company or policy. In all cases, the actual wording in the policy will govern.