You have to make a choice between two jobs.  They are both attractive in many ways – work you like to do, short commute, great people to work with,  Starbucks right next door (that’s high on my list).  The only difference is in the compensation packages offered:

Job #1 is offering you $120,000 annual income with semi-annual cost of living reviews.

Job #2 is offering you $116,000 annual income with semi-annual cost of living reviews.  Additionally, if you were to become disabled, you would still receive $5,500 per month (with annual cost of living increases), tax-free, for as long as you are disabled (up to age 65).

Which job would you choose?  If you answered #2, you have made a wise choice.  It’s basically job #1 with one difference – you have purchased an individual disability insurance policy.

If, due to accident or illness, you were not able to work in your occupation, but could potentially work in another, would you work at the other? If you are like most productive people, the thought of not being able to be productive in some capacity would probably not be appealing to you. That’s the reason true own-occupation disability insurance is selected by most professionals.

With a true own-occupation definition of disability, if, due to illness or injury, you cannot perform the duties of your occupation, you will receive disability benefits, even if you choose to work in another occupation. Notice the use of the word “choose.” With an own-occupation definition, the insurance company is not going to demand that you seek other employment if you are disabled. It’s your choice and, if you are like most professionals I speak to, you would probably seek other employment, provided you were physically capable of performing the duties of the new occupation.

If you have shopped for a disability insurance policy, you probably know that most insurance companies limit claims relating to mental/nervous disorders to two years. I have often heard, “that’s unfair” from prospective clients and, while I understand my clients’ concerns, I can also look at it from an insurance company viewpoint.

When you file disability claims for most diseases, the medical department of the insurance carrier can review the diagnosis, blood tests, x-rays and any other diagnostic tests performed to arrive at the diagnosis. It is black and white and pretty difficult to refute. The insurance company MD might questions the claimant’s physician about some aspects of the diagnosis but for most claims, it’s fairly cut and dry.

However, such is not the case with Mental/Nervous claims. There are no tests that can corroborate the physician’s subjective diagnosis, which is typically based on his observation of the patient alone and does not include any blood tests, x-rays or other diagnostic tools used by most physicians.

The insurance company would have to take the physician’s word and base the claim on that alone. Basing claims on this type of diagnosis alone would leave the insurance companies wide open to paying fraudulent claims. Because of this potential for fraud, insurance companies have had to limit these types of claims to two years.

I often hear this from prospective clients when they look at quotes for disability insurance. Very often, these same people recently purchased a term life insurance policy and are astounded by the difference in the cost between the two policies. “I can get a $1,000,000 term policy for $37.00 a month. Why does the disability policy with a $6,000 monthly benefit cost ten times as much?”

My short answer is, the higher the chance the insurance company has of paying a claim, the higher the cost of the insurance policy. The chance of one becoming disabled during his/her working years is far greater than the chance of dying during the period of a term life insurance policy. Therefore, the cost of the premium has to reflect this difference.

Additionally, the potential payout of a disability policy is usually much higher than a life insurance policy. For example, in the above mentioned disability policy, if the 30 year old policy-holder were to become disabled for the length of the policy term (typically to age 65), the payout would be approximately $2.5 million (without cost-of-living increases).

The best disability insurance policy is the one that will pay you the most benefits under the most amount of circumstance. These are some of the factors that would make this policy “perfect.”

• It should have an Own-Occupation definition of disability. This means that you would be considered disabled if, because of accident or illness, you could not perform the major duties of your occupation, even if you choose to work in another profession.
• It should have a Recovery Benefit. A recovery benefit means that if you return to work, even if recovered and fully released from medical care, and you have a loss of income benefits would be paid on a pro-rata basis.
• It should have a Cost of Living or Inflation rider so your benefits would keep up with inflation, should you become disabled.
• It should have an option that allows you to purchase additional coverage, as your income allows, without having to prove medical insurability.
• It should have a rider for catastrophic coverage, which would pay an additional benefit to cover any costs associated with assistive living services.

If your policy contained these benefits and it was with a highly rated, financially sound company, it would be a “perfect” disability policy.

Your occupation is one of the risk factors an insurance company looks at when underwriting your disability policy. It is one of the major elements, along with age, sex and health an insurance company uses to determine the premiums you will pay for the policy.

Generally, a specific job (e.g. anesthesiologist) is classified according to the occupational hazard presented by the actual duties performed. A carpenter, for instance, would present a greater risk to the insurance company than would an attorney and would most probably pay more for a similar policy.

In most cases, job title alone is not sufficient to determine the proper occupational class. To that end, a disability application will always ask for specific duties and percentage of time spent on those particular duties. The more specific you are on your application about your duties should make it easier for a claims adjuster to review and pay a claim.

Occupation classes are assigned numbers by each insurance company. These numbers are not standard industry-wide, so one company might assign a 4M while another company will consider the occupation a 5S. This can be confusing to those receiving disability insurance quotes, so it’s important to work with a broker who works with several companies and understands these occupation classes. Accurate quotes lead to fewer surprises when the policy is issued.