On a beautiful fall day, Sally was getting her five-year-old daughter, Ella, ready for her soccer game on the front porch step. While tying Ella’s shoes, Sally, a pediatric surgeon, was telling her how she saved the life of a young boy at the hospital that day who was Ella’s same age. With shoes tied, water bottle in hand, and a fruit tray for the team, they loaded up into the car. And then it happened!
Ella closed the door a second too quickly, catching her mother’s fingers in the door. Her mother screamed so loudly her neighbor, Ted, heard it and came rushing to help. They all got into the car, and Ted rushed them to the hospital. After evaluation, the hand surgeon said there was nerve damage that might be permanent.
One month later, Sally still didn’t have much feeling in her fingers. The hand surgeon determined that there was nothing that could be done to reverse the loss of feeling. Sally soon came to the realization that she would no longer be able to perform surgery. She was very worried. Unable to perform surgery, what would she do? How could she possibly replace her family’s main source of income? Fortunately, the local university got word of Sally’s injury and quickly offered her a position on their staff. Sally happily accepted. However, this position would pay just 45% of what she earned as a surgeon. Luckily for Sally and her family, she not only had long-term disability insurance, but she also had an “own occupation” disability clause in her policy.
In the end, Sally’s disability coverage made up the loss of 55% of her income, allowing her family to maintain the lifestyle they were accustomed to before the accident. However, the insurance would not have paid any benefit if the “own occupation” clause was not included in the policy – I’ll dive more into this later on.
What Is Long-Term Disability Insurance?
Long-term disability insurance is an often overlooked aspect of an individual’s financial picture. Most employers provide their employees with some type of short-term disability insurance. However, many policies will only cover up to 180 days of absence, at which point the employee must get back to work, or find a new source of income. This is where long-term disability coverage steps in. In some cases Social Security Disability Income will provide a benefit, but the parameters for qualifying for this type of coverage are very narrow. According to Nolo, a website dedicated to helping consumers and businesses find answers to their legal questions, 65% of initial claims and 85% of appeals for Social Security Disability Income are denied.
Long-term disability insurance will start paying income after a short waiting period (usually 90-180 days), and often continues to pay for the duration of your disability – extending to full retirement age if needed. Many people think accidents (auto collusions, falls, etc.) are the main cause of disability in the U.S. However, according to the Center for Disease Control, some of the main causes for disability that might not come to mind are arthritis, heart issues, mental illness, and cancer. Sadly, these conditions are all-too-common, even for those who are responsible for providing financially for family. The hard truth is that any of these may come your way, and if it happens, you will be forced to deal with it.
Own Occupation Clause
In Sally and Ella’s scenario above, I mentioned an “own occupation” clause. If you have the education, training, certification, etc. to perform a specific occupation, this clause is critical.
MD, CPA, Esq., CFA, or any other professional credential after your name? If so, be sure to read on.
If Sally did not have this “own occupation” clause she likely would not have received any benefit from her insurance coverage. Without this clause, if you are still able to work in any capacity, even if it does not involve your prior profession, a benefit typically will not be paid.
How It Works
Below is an example that demonstrates the difference an “own occupation” clause can make on a policy.
- Sally’s income is $400,000/year before disability
- After disability her new position at the local university pays $180,000/year
- This leaves a loss in income of $220,000/year
- Policy without “own occupation” clause:
- Sally’s income would be reduced to $180,000
- Policy with “own occupation” clause:
- Sally would receive the $180,000 in income from her employment at the college and the benefit from her insurance coverage of $220,000, meaning her total income would be the same as it was before the accident ($400,000).
Assuming Sally is 39 and in good health, this type of coverage according to Policy Genius would cost her about $500/month which totals to only 1.5% of her gross income. With long-term disability, like many other things in life, you get what you pay for, and in this case good coverage is not likely to be cheap.
Make Sure You Understand Your Policy!
Most, if not all, insurance companies have different definitions of disability, whether it be “regular” or “own occupation.” A definition might read something like: “An individual is considered totally disabled if they are unable to perform each of their main duties involved in their occupation.” A word as small as “each” can cause major difficulties, and companies will use a plethora of words which can cause your coverage to be denied when you need it most. Insurance companies are not trying to trick the public, but are rather trying to limit their potential losses so the pricing they offer can be competitive.
Your ability to earn an income, especially at a younger age, is often your most valuable financial asset. Long-term disability coverage is something that should not be overlooked while you are working. Unfortunately, it can be very confusing when evaluating the different options available. At Johnson Investment Counsel, we are happy to help you sort through the complexities and recommend a trusted source to obtain appropriate coverage for you and your family.
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