Part 1: IT Workers, Business Owners, and Executives
The short answer is usually not. If you are insuring a computer programmer, a business owner or an executive, usually an Own Occupation and Not Working is the sweet spot.
One of the most misunderstood and most important aspects of a disability insurance policy is the definition of disability. For those insurance agents and financial planners who have not sold many or any DI policies, usually the one thing they remember from their preparation for the licensing exam is “always recommend an own occupation definition.” If this is the one thing you remember, it’s not bad advice actually, but the reality of what is available and what is best for your client is a bit more complicated.
To review, there are essentially four levels of protection available (you could slice this case into more pieces, but for the sake of simplicity I will touch on four categories).
The weakest level is associated with Social Security Disability Income: The law defines disability as the inability to engage in any substantial gainful activity (SGA) by reason of any medically determinable physical or mental impairment(s) 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 (www.ssa.gov/disability/professionals/bluebook/general-info.htm). We hope your clients never have to prove that they meet this definition—and this by itself is a good reason to sell DI to your clients—to save them from having to prove to the government that they cannot hold any job.
A step up from that is language from Disability Insurance Carriers that reads something like: You are unable to perform the substantial and material duties on any occupation for which you are reasonably qualified by means of your education, training and experience.
Clients in manually intensive or physically challenging careers often end up with a policy with this definition. It might start out with a stronger definition and then switch to this after two or five years. Sometimes it is the best that can be offered, and still it provides far more protection than SSI or workman’s comp.
Your client will have to meet the elimination period associated with the policy (so already much better than SSI), but it leaves a lot of leeway for the carrier to determine what might be a viable alternative if your client cannot perform his or her job and thus we only recommend it when a stronger definition is not available.
If someone has invested in education and time achieving a level of success in an occupation (eg starting a small business), he or she likely will not appreciate being told that they can provide telephone customer support or some other such job in which they have little interest and that will likely not pay them as well. Sometimes saving money by limiting the definition of disability makes sense, but usually in this case it does not. But often there is no other option for those in manually intensive occupations.
Own Occupation definitions offer more protection and generally are preferred when available. Your client will never be required to apply for a job in another field if he or she cannot perform his or her own occupation. A True Own Occupation definition reads something like: You are disabled if you are unable to perform the substantial and material duties of your occupation. Sometimes this definition also defines medical or legal specialties as recognized “occupations.” The key here is that there are no modifying clauses which limit the carrier’s exposure to liability, ie no language that states that you must not be working in another occupation or how much you can make in that new occupation without it affecting your benefit. This definition has come to be the gold standard in the industry and certainly is the definition preferred by physicians (who buy DI more than any other occupations) and by attorneys (more on these in a future blog).
Own Occupation and Not Working definitions add a modifying clause to the true own occ definition listed above stating simply that: …and are not working in another occupation. This clause reduces the carrier’s exposure to liability because they do not have to pay, or perhaps would have to pay less, if the client chooses to work in a different occupation. Such language sounds like it must be good for the client. In fact not having that modification does make it easier for the client to go on claim and to then work in a different occupation and keep receiving the full benefit. Sounds good. But what makes the most sense for your client?
A little more context: Not having that modifying clause of not working in another occupation adds to the cost—typically between 8% and 12% more than without the rider. The only thing that this additional cost buys the client is the ability to work in a different occupation if disabled from his or her own.
The statistical reality is that there are very, very few claims that become true own occ claims, i.e. the client cannot do his or her job but chooses to work in a different occupation (even most physicians who return from a disability go back to their previous specialty).
At most carriers (probably all carriers) they can count on one or perhaps two hands the number of open true own occ claims they have at any one time. And these claims almost never involve executives or small business owners. Most people who go on claim go back to work at some point, but most go back to the same careers/occupations they were in when disabled—this fact is doubly true for small business owners. If their business is still open, they return to it.
If so few claims become true own occ claims, why do the carriers charge so much for it, you might be wondering. Honestly, I think it is overpriced, but the response I have been given by several carriers is that the costs of dealing with true own occ claims is higher: If the true own occ rider is on the policy (a few carriers build it into the policy but that is the exception not the rule), the owner of the policy is more likely to file a claim and is likely to stay on claim much longer if the claim is approved.
Most of the best DI carriers these days offer both a true own occ and an own occ and not working definition to executives and owners of small businesses (not primarily involved in manual labor). A 10% savings may not seem like much if it gives the client more peace of mind. And if it does in fact add peace of mind for the client it is money well spent in my view. But a policy that costs $3,000 a year might save about $300 a year without the true own occ rider. Again this is not a huge amount, but if the client buys that policy at age 37 and holds it for 30 years (or longer), suddenly the $300 a year, plus the opportunity cost of not investing that money becomes more significant.
In sum, for most office workers in the modern US economy, and especially for small business owners, paying extra for a true own occupation definition is not worth the extra money. It is worth the money, in our view, to pay extra to have an own occupation and not working definition.