I might kill a sacred cow today as we talk about disability insurance (PS: May is almost over meaning this disability insurance bonanza is soon coming to an end), but going against the grain is just sort of in my nature, and you'll learn today that I have no friends when it comes to making thoughtful comments and insurance recommendations.
As we already know, pure (true) own-occ disability coverage means you are considered totally disabled when you cannot perform the material and substantial duties of your own occupation
even if you are working someone where else and earning income. And this definition has been the highlight sought after contract language insurance agents/brokers have recommended to their clients (at least those who considered themselves experts on the subject). But is it really necessary to ensure that you would receive a check from your policy if you couldn't do what you do now but could do something else for earned income? Does the cost of having the benefit makes sense?
If you Can't Cut, you can Teach…and you can STILL GET PAID!
The Medical market has long been over saturated with insurance agents/brokers who focus specifically on disability insurance. Why? Because doctors live the world of debilitating disease and injury every day. They know what it can do to someone, and they can't get away from it as a consideration. That, and they happen to be highly trained, usually somewhat well paid (but by no means overpaid) individuals. So, you take the most expensive form of disability insurance (pure own-occ) and bring it to people with something to loose if they got sick or hurt and couldn't practice their craft who just happen to be people who have to deal with this stuff every day of their life. And you make it easy. How easy?
“Well Dr. so-and-so, here's how easy it is. If you can't cut (perform surgery) you can teach, and you can still get paid.” Meaning if you lose the ability to perform hands on medical procedures you can collect from a policy pegged to your income as a highly trained practicing medical professional, and you can put all that knowledge you have on the subject to work as an academic, and collect a salary there as well.
So we round up the residents headed into higher paying surgical dependent medical professions, buy them pizza every other week, and tell them each time “If you can't cut…” you get it by now.
And truth is for these people, this might make sense. After all their higher higher than average incomes are the result of years of specialized training that is costly both in a pecuniary sense and in the form of their personal time. Loosing a thumb in a landscaping mishap or developing carpel-tunnel takes all those years and dollars spent and throws them in the trash.
But…there is a Special Catch
The term doctor covers a wide range of possible professions. For example, earning a living as an Internist is very different than earning a living as a Pediatrician. Pure own-occ is a nice idea, but if your disability policy doesn't define your occupation specifically enough, it isn't going to be of much help. The good news is, most major disability insurance carriers have decided to define medical occupations by their specialty, and on top of that, contract language can get into specifics about what the material and substantial duties of an occupation are, as stipulated by the insured (i.e. it doesn't matter what we label the occupation as, it matters what the insured is actually doing).
What About the Non-Medical Market or the Less Hands On Medical Market?
Here's where it gets interesting. Let's say I'm an Engineer. My days are spent mostly at a desk where I design things. Unlike the very finely tuned surgeon, who would be out of work if he lost the use of his left hand, it's going to take quite a bit before I can't do the material and substantial duties of my occupation.
So, Go for Any-Occ Disability Insurance Instead?
Not so fast. While the cost of own-occ coverage for the standard desk job, is questionably worth it, keep in mind that any-occ means I'm only eligible to be on claim if I cannot do the material and substantial duties of ANY occupation for which I am appropriately trained. An attorney may develop a heart condition that is aggravated by the stress of preparing for and arguing cases in court, but that doesn't mean he can't take it easy practicing law outside of the court room, or stocking shelves at a grocery store. Like I stated already, any-occ means if you can work somewhere else and earn 60% of the income you do now, you aren't eligible for benefits.
Modified Own-Occ: The Happy Compromise
Modified own-occ removed the ugliness of any-occ coverage, without the pure own-occ price tag. It means you'll qualify for benefits if you cannot perform the material and substantial duties of your occupation as long as you are not engaged in another activity where you are earning income. So, even though the stressed out attorney with the bad ticker could work in a different capacity within the legal world, or stock shelves, if he chooses not to do this, he'll receive benefits from his policy. There are some companies that place this into their so called “pure own-occ” language as an “anti-meandering” measure, so really, they are simply writing modified own-occ contracts, but charging pure own-occ prices (sneaky sneaky).
So Who should Opt for Pure Own-Occ and Who should Opt for Modified Own-Occ?
I don't think we can fairly answer this question categorically. Instead it comes down really to two things:
How You Feel about Your Disability Insurance Needs
If knowing that no matter what happens, you can receive payment from your disability insurance if you are sick or hurt and unable to perform that material and substantial duties of your occupation, even if working somewhere else earning money, makes you sleep better at night, and you're willing to pay the extra cost, there's absolutely nothing wrong with purchasing pure own-occ coverage. Remember money isn't always about math and there are variables that factor into a decision equation that can be extraordinarily difficult to quantify. I know plenty of people who own pure own-occ coverage who don't fit the usual suspect profile, and I've sold policies to people who didn't fit the usual suspect profile. For them, it's the best, and they would settle for nothing less. Piece of mind can be a very valuable thing.
The Costly to Fake Principle
There's a subsection of Micro-Economics that begets a lot of the foundation of actuarial science. Under the umbrella of the economics of risk management and forecasting is the task of making choices where there is a high degree of uncertainty. Economists commonly refer to a tool known as Signaling Theory to make better choices when faced with an inter-temporal choice that carries a considerable unknown. One of the big principles behind signaling choice theory is that an attribute used to evaluate the situation and help determine the right decision must be costly to fake if it's going to be helpful with your evaluation.
For example, let's say I want to hire an insurance agent/broker and I want to evaluate him/her. He/she may have a very friendly personality, dress well, and show up on time to the appointments we've set for out meetings. But none of these characteristics help much in determining his or her competence with respect to his or her ability to do the job for which I'm looking to hire him or her. Instead I'll need to look at features that are more costly to fake. Can he or she answer my questions? Does he or she know where to go to find answers to questions he or she can not immediately answer? Does he or she know what topics I may be overlooking by bringing them to my attention? Just about anyone can buy a nice suit, pretend to be friendly for an hour, and show up on time once. But displaying a deep knowledge on a subject is something completely different, and it takes a lot more effort.
How do we use this principle for disability insurance regarding the value of pure own-occ coverage? We simply look at the industry as a whole. Do you have an occupation for which it's rather difficult to find carriers willing to write pure own-occ coverage on your occupation? Or will anyone do it since the likelihood of your going on claim in a way that really makes use of that definition is minimal? General Dentists and Anesthesiologists are two great examples of professions where pure own-occ coverage is hard to find. Accountants and Engineers on the other hand are two examples of professions where just about anyone is willing to give them this type of coverage. It's not bullet proof, but using this principle to weigh your options regarding need of specific contract language could be helpful, guidance from an experienced agent is a great complementary approach.
Quality Still Counts
While pure own-occ coverage may not be the most important aspect to your income continuation plan, it's important to keep in mind that your income is likely the driver behind everything you do. So, ensuring that it's still there if you can't work is a very wise financial decision, and making use of a disability insurance contract that has strong contract language (i.e. good features) elsewhere is important. If you're a highly trained professional (even one who sits at a desk most hours of the day) it's best not to purchase your disability insurance from a carrier that issues most of it's policies to people who work in less skilled occupations where risks are generally higher and contract language has a few loop holes. Like elsewhere in the industry there are no bad disability insurance products, just bad matches of contract to client.