Disability insurance policies can get complicated. Nothing demonstrates that complexity more than the different disability definitions you can choose from.
The purpose of disability insurance is to replace the income one loses in the event that illness or injury adversely affects their ability to earn a living. But certain ailments have varying impacts on the ability of different professionals to perform their jobs.
That’s why insurance carriers write into their contracts a specific definition of disability to determine whether you qualify for benefits. Policies may be flexible to the point where any loss of income due to injury or illness can qualify for benefits. Other policies have strict definitions that make it more difficult to qualify for benefits.
When you shop for coverage, you should know that the disability definition on a policy will determine whether certain illnesses or injuries will be covered, what you will collect in benefits, and how much you pay in premium.
In this article, we cover everything you need to know about the two main definitions of disability that a disability insurance policy can have:
- Own-occupation disability
- True own-occupation
- Modified own-occupation
- Transitional own-occupation
- Any-occupation disability
- Other disability definitions
Read on to learn more.
An own-occupation disability insurance policy protects your ability to work in your given profession. You will be covered if a disability prevents or limits you from working the job you had before you became disabled. Even if you’re able to work in another capacity, you may still be eligible for benefits.
An own-occupation policy can protect professionals even in the event they have to take a similar job in the same field. For example, medical professionals who lose the ability to practice in one area but can still practice medicine in another capacity can still qualify for disability benefits under an own-occupation definition.
However, not all own-occupation provisions are equal. Here are the three main types of own-occupation disability insurance coverage:
True own-occupation disability insurance
As its name suggests, true own-occupation is the most comprehensive definition of disability that a policy can have.
A typical true own-occupation provision will state: “You are not able to perform the material and substantial duties of your occupation, even if you are gainfully employed in another occupation. If you meet the definition of totally disabled and you become employed in a new occupation, your total disability benefit will not be affected by any income from the new occupation, regardless of the amount.”
A few companies will define you as disabled if:
- You have to work fewer hours because of a disability.
- There are some tasks in your job you can’t perform.
If you're lucky, a true own-occupation provision may be included in your base coverage. In other cases, it may only be available as a rider. Because of how wide this definition of disability is, some insurance companies will not make it available to certain professions.
True own-occupation policies will be the most expensive, all other things being equal. However, for those with high-paying and/or highly-specialized careers, having a policy with this definition is essential.
On the other hand, people who work in lower-paying jobs that don’t require specialized skills can opt for an any occupation policy.
Modified own-occupation disability insurance
A modified own-occupation defines disability as the inability to perform any job. How it differs from the any-occupation definition of disability is that you will receive benefits if you choose not to work. An any-occupation policy will deny claims if you are deemed capable of working, but choose not to.
A modified own-occupation might also be referred to as non-engaged. It may define disability as the inability to perform any job.
The job you choose does not have to be the same as your chosen profession. But a modified own-occupation may stipulate that it’s one you are generally qualified to perform. The policy might state that if your new job is“fair” you will not be paid disability benefits. A “fair” profession will be based on your skills, education, and background.
For example, the surgeon who becomes a medical school instructor would likely not collect benefits under modified own occupation. This is true even though the teaching job pays less than a surgeon makes.
Transitional own-occupation disability insurance
The transitional own-occupation definition of disability is similar to true own-occupation coverage. The difference lies in how benefits are impacted if you work in another occupation following an injury or illness.
A transitional own-occupation policy limits your benefits based on the difference between your total disability benefit amount and post-disability income.
For example, imagine your benefit for a complete disability is $5,000 a month. You suffer an injury that prevents you from working in the same job you had before your disability. But you find a new job that pays $3,500 a month. Under a transitional own-occupation, your benefits will be reduced to $1,500 per month.
A transitional own-occupation benefit will only apply if you earn less than you did before your disability.
The any-occupation definition of disability is the opposite of the own-occupation definition of disability.
If your disability insurance policy has an any-occupation definition, you will only receive benefits if you are unable to work in any capacity.
Under this type of policy, you may be ineligible for benefits if you can work another job following an injury or illness that limits your ability to do your normal work. This is true regardless of your chosen profession.
With an any-occupation policy, it also does not matter if you choose not to work in another profession. It only matters that you are physically able and have the capability of performing other work.
Any-occupation policies are designed for serious disabilities that prevent you from working at all.
A typical policy definition of any occupation is: “You are unable due to illness or injury to perform all the substantial and material duties of any occupation for which you are fitted by education, training, and experience.”
This policy type only pays benefits if you can’t perform work “reasonably suited” to you. A number of factors define “reasonably suited.” The insurance company will assess whether you can find a job that:
- You are qualified to perform, based on skills and education.
- Pays a minimum percentage of what you earned prior to the disability. A typical level is 60 percent of your pre-disability wages.
- Is located within a reasonable distance from your home.
- Will allow you to attend scheduled appointments and treatments.
- Your physician will sign off on you to perform.
This is the strictest definition that a disability insurance policy can carry. As such, any-occupation disability policies typically:
- Costs less than policies with other disability definitions
- Offers the least amount of coverage
- Has the highest incidence of claims denials
Who might consider any-occupation disability
People who work in lower-paying jobs that don’t require specialized skills can opt for an any-occupation policy. That’s because a disability that prevents them from working their normal job will likely keep them from working at all. This includes professions in retail, customer service, hospitality, or janitorial.
Who should avoid any-occupation disability
People in highly-skilled, high-paying professions should not settle for this type of policy. A disability that prevents you from working in your chosen field won’t necessarily keep you from performing other work.
Also, if you have a well-paying profession that you couldn’t do if you lost the use of part of your body, you should avoid any occupation policies. For example, a mechanic, contractor, or plumber who loses the use of a hand could still perform other jobs, yet would probably make less money if forced to do so.
Understanding the differences between own-occupation vs. any-occupation is essential for anyone who is in the market for disability insurance coverage. However, there are some other definitions of disability you should know as well.
If you are partially disabled, it means you have an injury or illness that enables you to work but only with reduced responsibilities or hours worked. You may receive partial disability benefits under an own-occupation policy or any-occupation policy.
This is a serious disability that an insurance carrier considers permanent. Insureds who suffer a presumptive disability typically will not have to wait through their elimination period to receive benefits. Policyholders also would not have to undergo medical examinations to show that their disability continues to impair them. Most carriers consider the following conditions to be presumptive disabilities:
- Loss of sight in both eyes
- Complete loss of hearing
- Loss of speech
- Loss of the use of your hands
- Loss of the use of your feet
- Loss of limb
The definition of disability in your disability insurance policy is extremely important. If an injury or illness prevents you from working, your disability definition could be the difference between receiving the benefits you need and not receiving any at all. Regardless of your job occupation or income level, it's important to consult a disability insurance professional regarding the best definition of disability for your coverage needs.
Jack Wolstenholm is the head of content at Breeze.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.