The definition of disability is the single-most important factor to consider when discussing a disability income contract with your clients. It triggers the claim and determines under what conditions and how long a claim will be paid, so you and your clients need to understand the options.
When purchasing individual disability income (IDI) insurance, clients should be aware that there are different occupation definitions of disability. It’s helpful if the producer is well-versed in these differences, so he or she can help clients select the best option.
There are four definitions of disability available in the marketplace:
- “True” own occupation–this definition allows the insured to continue receiving he maximum monthly benefit if he or she become disabled in his or her occupation, even if he or she is working in another occupation. It is the strongest definition of disability available. Physicians primarily seek this definition because it will protect them in their specialty, even if they are practicing in another specialty.
- Transitional own occupation–this definition allows the insured to continue to receive disability benefits if he or she becomes disabled, but is working in another occupation. However, the income earned in the new occupation plus the benefits from the disability policy and other disability benefit sources cannot exceed 100 percent of prior earnings. If they do exceed the insured’s prior earnings, the monthly disability benefit will be offset by that amount.
- “Modified” own occupation–this definition allows the insured to receive the maximum monthly benefit if he or she is disabled in his or her occupation and not engaged in any other gainful occupation. For many occupations this is a quality definition because their skills are not highly specialized. If they could not perform the duties of their occupation, they likely could not work at another occupation either.
- Reasonable occupation–this definition is the most ambiguous and the least desirable because the insured is considered disabled if he or she is not able to perform the duties of his or her own occupation or the duties of any occupation based on his or her training and education and that would provide 60% of his or her pre-disability salary. This definition leaves a lot of discretion to the carrier.
Definitions 1 and 3 are the least ambiguous and the most desirable for your clients. Definition 2 is more challenging because the insured must provide monthly income statements to the carrier, which is a paperwork headache. Nevertheless it will protect the insured in his or her own occupation. Definition 4 should be avoided if at all possible; however, in some manual occupations it is the only definition available.
When helping clients, evaluate their needs. Be sure to recommend the occupational definition of disability that best suits their income protection needs and their occupation.