Disability income insurance is designed to replace the lost wages that occur when a worker is no longer able to perform his job, usually due to a physical injury. Most employer benefit plans offer group disability insurance, and this is how most workers obtain coverage. However, many individuals obtain policies directly from an insurance company, especially self-employed professionals.
While most people are familiar with the importance of life insurance, many are not as knowledgeable about disability insurance. But here are some striking statistics:
• One in three employees will become disabled for 90 days or more before age 65
• One in seven employees will be disabled for five years or more before retirement
• One out of 18 mortgages is not paid due to a disability of the mortgage holder
• Almost 50 percent of disability claims are denied by the Social Security Administration
So it could be argued that disability insurance is actually more important than life insurance for the average worker. Unfortunately, disability insurance is one of the most difficult forms of insurance to obtain.
Individual disability insurance policies normally provide 60 to 70 percent of the insured’s normal gross income. Insurance companies will not provide 100 percent so as to encourage individuals to return to work when they are able. Benefit periods can range from two years to life. The insured’s occupation plays the primary role in determining the length of coverage, the premium, and the definition of disability that will be used to determine benefit eligibility.
Insurance companies use a variety of “definitions” of disability. This is one of the most critical elements of any disability insurance policy since it determines under what conditions the policy will pay benefits.
The most restrictive definition is the Social Security definition which states: “The inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.” In other words, to receive benefits using the Social Security definition, a doctor must attest that not only can you not perform your normal job, but that you cannot perform any other substantial work that exists in the national economy. Clearly, it is very difficult to qualify for disability benefits under this definition. This is why many individuals seek private disability insurance.
The equivalent to the Social Security definition in private insurance policies is called the Any Occupation definition. This type of policy will not pay unless the worker is unable to work at any gainful occupation. That is, even though the worker may no longer be able to work in his chosen field, if he is able to work at any job in the economy (even one that pays much less than his original job) he is not considered disabled and the policy will not pay.
The Modified Any Occupation definition is slightly less restrictive, and defines disability as the inability of the worker to hold a job for which he is reasonably qualified based on education, training, and experience.
The least restrictive definition is Own Occupation. Under this standard, the worker is considered totally disabled if he is unable to perform the primary duties of his own occupation (i.e., the job he held before becoming disabled). Clearly, this is the preferred definition from the worker’s perspective, but insurance companies are very strict about issuing such policies and the premiums for such policies are very high.
In recent years, the Split definition has been introduced which combines the own occupation and modified any occupation definitions. In this case, the more liberal own occupation definition is applied for a limited time (perhaps 2 to 5 years), after which the more restrictive modified any occupation definition is applied.
When evaluating different disability policies, make sure you clearly understand the definition of disability that will be applied.
