07 Aug Understanding your disability insurance coverage

 Q. I have “own occupation” disability insurance. How is that different from “any occupation,” which is more expensive, right?

A. You’ve actually gotten the definitions backwards, and your disability coverage sounds like the better of the two.

But the language in your specific disability insurance policy is what’s critical here.

“An `own occupation’ definition of disability is the most desirable as it considers a policyholder claim eligible if they cannot perform the major duties of their own specific occupation,” said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock. “They can be working in another occupation and the claim would still get paid.”

Gaelick said an “any occupation” definition is much broader, and a claim would be paid if someone was basically unable to work at all.

Changing a few key words can make a huge difference if or when you ever need to file a claim, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

At the top of the ladder, he said, you have what is referred to as “true own occupation.”

“This means the policy will pay you full benefits if you are injured or sick to the extent that you cannot perform the material and substantial duties of your own occupation, regardless of whether or not you are able to work in another capacity,” he said.

For example, let’s say an orthopedic surgeon earning $500,000 a year injures his dominant hand and can never perform surgery again. He then takes a job at a prosthetic company as a consultant and earns $1 million-plus between salary and stock options.

“Under this scenario he would still be able to collect full benefits on his disability contract because he is unable to perform the material and substantial duties of his own occupation, which was an orthopedic surgeon at the time he purchased the contract,” DeFelice said. “This is the best definition of total disability that you can have in a disability contract, and usually carries the highest premium.”

After that, there are several “watered down” versions of total disability — each one less expensive than true own occupation coverage.

DeFelice said some carriers have what is called “transitional own occupation” coverage. This means you will get paid full benefits on your policy if you cannot do your own occupation even if you are working somewhere else, earning up to your pre-disability income.

“Once the combination of current salary and monthly disability benefits exceed what you earned prior to the disability, your disability benefits will be reduced proportionately,” he said.

Then you have “own occupation and not working,” which means just that: you will get paid full benefits if you cannot perform the material and substantial duties of your own occupation as long as you are not working in any gainful employment, DeFelice said.

“If you decide you are able to work in a different capacity and earn any income, your disability benefits will cease to be paid,” he said.

Lastly, you have “own occupation for a certain period (usually 2 or 5 years), and then any occupation.”

“This means you will have coverage if you cannot do your job for a period of 2 or 5 years, and then you will only continue to collect benefits if you cannot do any job for gainful employment,” DeFelice said. “This definition will carry the cheapest premium in an individual disability policy since you will have to be in really bad shape to never be able to work again in any capacity to collect full benefits.”

DeFelice said Social Security Disability carries a good example of what you would refer to as “any occupation” coverage. To qualify for Social Security Disability you have to meet three criteria: You cannot do the work that you did before, Social Security decides that you cannot adjust to other work because of your injury or sickness, and your disability has lasted or is expected to last at least one year or to result in death.

“This is a strict definition of disability, and gives you the least flexibility to actually collect,” he said.

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This story was first posted in August 2015.