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Disability Insurance | NextGenAdvisor

Disability Insurance

Disability insurance also makes up a significant part of our practice.  For most people, their most important asset is their ability to earn an income.  Our income drives our financial life. It is the engine that provides for our financial security.  It’s tempting to think of life insurance as being more important than disability insurance; however, the odds of becoming disabled are greater during one’s working years than the risk of premature death.  Furthermore, it is important to insure our income, whether we have dependents or not. Disability insurance is an especially important need for white collar professionals whose lifelong earning potential can be substantial.

Unlike term life insurance, disability insurance has many nuances and product expertise is especially important.  Many important features can be added to a disability policy and many come standard, depending upon the policy. It is also common for clients to have existing group disability coverage, which must be taken into account in any planning situation.  In addition, there are different definitions of what it means to be disabled, and these definitions significantly impact policy premiums and benefits.

In our experience reviewing existing disability insurance policies, we find that many clients have purchased features that do not provide great value and sometimes have failed to purchase features that do provide great value.  In addition, we find some clients have purchased disability coverage with an inappropriate definition of disability.  

Most white collar professionals purchase individual disability insurance with some form of an “own occupation” or “regular occupation” definition of disability. Own occupation refers to one’s ability to perform the duties of his or her “own” or “regular” occupation, and the three most common own occupation definitions are true, transitional, and basic.

A true own occupation definition of disability is the gold standard in disability insurance.  However, there is a cost associated with having the gold standard and for many buyers it is not necessary.  For example, the duties of some occupations are so general that if the insured cannot perform them, he would not likely be able to perform the duties of virtually any occupation.  The occupation of managing a company, for example, can be done by someone who is significantly disabled; however, a dentist or a surgeon may be totally disabled from his or her regular occupation by losing the partial use of a finger or suffering a back injury.  As a result, true own occupation coverage may be most appropriate for a dentist or a surgeon, but basic own occupation coverage may be most appropriate and cost-effective for many other professions.


Basic Own Occupation

A basic own occupation definition of disability means that the insured cannot be forced back to work by the insurance company if totally disabled from his or her own occupation.  However, if the insured voluntarily goes back to work in another occupation, there may be a reduction in disability benefits.

Consider a dentist who earns $300,000 per year from dentistry before becoming totally disabled.  Let’s also assume that the dentist has an individual disability policy with a basic own occupation definition of disability and a maximum benefit of $15,000 per month or $180,000 per year.  The dentist becomes totally disabled from dentistry and normally would receive a benefit of $15,000 per month or $180,000 per year; however, he chooses to work in another occupation and earns $12,000 per month or $144,000 per year. Under a basic own occupation definition, benefits are reduced proportionate to the dentist’s loss of income.  If the dentist was making $25,000 per month before becoming disabled and makes $12,000 per month after becoming disabled, his loss of income is 52% ($12,000/$25,000 – 1 = 52%) and he would, therefore, be eligible for 52% of his disability benefit or $7,800 per month ($15,000 * .52 = $7,800) or $93,600 per year.

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Disability Benefit Calculation

Transitional Own Occupation

A transitional own occupation definition of disability also means that the insured cannot be forced back to work by the insurance company if totally disabled from his or her own occupation.  However, if the insured voluntarily goes back to work in another occupation, there will be a reduction in disability benefits if the earnings from the new occupation and benefits from the disability policy exceed the insured’s pre-disability income.

Consider the same dentist in the above example who would receive a benefit of $7,800 per month under a basic own occupation definition of disability.  With a transitional own occupation definition of disability, the dentist would receive a benefit of $13,000 per month or $156,000 per year since the combination of the disability benefit of $156,000 per year plus the income from the new occupation of $144,000 per year does not exceed $300,000 per year, which was the dentist’s pre-disability income.   

True Own Occupation

A true own occupation definition of disability also means that the insured cannot be forced back to work by the insurance company if totally disabled from his or her own occupation, and if the insured voluntarily goes back to work in another occupation, there is no amount of earnings that would trigger a reduction in disability benefits. 

Consider the same dentist in the above example who would receive a benefit of $7,800 per month under a basic own occupation definition of disability and $13,000 per month under a transitional own occupation definition.  With a true own occupation definition of disability, the dentist would receive a benefit of $15,000 per month or $180,000 per year since a true own occupation definition never takes income from an insured’s new occupation into consideration.

Speak with an Insurance Advisor today about Disability Insurance

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