How Does Own Occupation Disability Insurance Work?

Would you be able to maintain your lifestyle if you were unable to work in your chosen profession for a year due to an injury or illness? How about for 5 years?

According to estimates, one out of every five Canadians aged 15 and up live with a disability. A disability, even if only temporary, can have serious financial consequences for anyone who works.

The stakes are especially high for professionals with high-paying jobs, such as doctors and lawyers, whose ability to earn is heavily dependent on certain cognitive and physical abilities. If your work skills are impacted, you may be able to work in another profession, but will likely earn far less money than you do now. Even minor injuries can prevent you from working in your chosen profession.

Disability insurance safeguards your most valuable asset: your earning ability. If you are unable to work due to injury or illness, it provides a consistent source of income.

If you have a well-paying job, however, any disability plan will not suffice. Rather, you need a policy that protects your ability to work in your chosen profession.

In this post, you will learn what own-occupation disability insurance is, how it works, and whether it's right for you.

What is Disability Insurance?

Disability insurance is a contract between you and the insurance company, in which the insurance company promises to pay you a fixed monthly benefit for a predefined period if you are too injured or sick to work. You do not need to submit any bills to the insurer to receive the monthly payments and are free to use the money however you like. You can use the payout to buy daily essentials, pay for medicines, pay off debts, or even pay for a vacation. 

Disability insurance policies usually have a waiting period. This is a short period you must wait before you can start collecting the benefits. 

Disability insurance policies are of two types: 

• Short-term disability (STD): These policies cover short-term disabilities and replace 60% to 80% of your pre-disability income. The payout period is usually 3 to 6 months, but can go up to 12 months. The waiting period is usually 7 days, although some STD policies issue benefits immediately after you become disabled. 

• Long-term disability (LTD): These plans cover severe disabilities and typically replace 60% to 80% of your income. Most long-term disability policies pay out for two, five, or 10 years. Some issue benefits until retirement. The waiting period is typically 90 to 120 days. Keep in mind, not all LTD plans define total disability the same way. Some define total disability as own-occupation disability, while others define it as any-occupation disability. The own-occupation disability is the more lenient of the two. As such, it provides more comprehensive coverage and is more expensive. 

What is Own-Occupation Disability Insurance?

Own-occupation disability insurance issues a monthly payment if you cannot perform the substantial duties of your last job due to disability. Under this definition, the insurer will issue monthly benefits even if you take another job for which you are reasonably qualified. 

Own-occupation disability insurance is a good choice for anyone who would earn significantly less if they became disabled and could not work in their chosen profession.

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How does Own-Occupation Disability Insurance work?

Here is an example that shows how own-occupation disability insurance works: 

Let us say a surgeon loses the fingers of his right hand because of an accident, making him unable to perform the substantial tasks of his chosen profession. If he has an own-occupation disability policy, he is eligible for disability benefits, even though he could take up a consulting or teaching job. 

In contrast, if the surgeon has an any-occupation disability policy, he will not receive the payout. Any-occupation disability insurance pays benefits only when then disability is so severe that it prevents the insurer from doing any work for which he is qualified based on his education, experience, and professional training.

Keep in mind whether the insured starts working or not is irrelevant. If the insurance company deems you fit enough for another occupation, it will deny your benefits.  

Types of Own-Occupation Disability

Here are the main types of own-occupation disability insurance:

1. True own-occupation 

Under true own-occupation disability, you receive the payout if your disability prevents you from working in your own occupation, but not necessarily any other. True own-occupation disability is also referred to as simply “own-occupation disability” or “regular occupation disability.” 

If the surgeon in the above example has true own-occupation disability insurance, he will receive the monthly benefits for the entire payout period, even if he becomes a lecturer a year after the accident.   

2. Modified Own-Occupation

The modified own-occupation disability insurance pays a replacement income as long as you do not take another job. Accordingly, the surgeon in the above example will receive monthly payments as long as he does not work in another occupation. The moment he takes the job of a lecturer, the payments will stop. 

3. Transitional Own-Occupation

The transitional own-occupation disability insurance is similar to true own-occupation insurance. The only difference between the two is in how your post-disability income affects the benefits. 

If you start working again, the transitional own-occupation policy will reduce the benefits to the difference between your total disability benefit and post-disability income. In contrast, under a true own-occupation definition, you will receive the total disability benefits even after you start working again. 

Continuing with the surgeon example, let's say his total disability benefit is $10,000 per month. A year after the injury, he takes up the job of lecturer and earns $6,000 a month. For the first year, the insurer will pay the entire benefit amount — $10,000. But after that, his benefits will be reduced to $4,000. 

A transitional own-occupation disability policy pays benefits only if your post-disability salary is lower than your pre-disability salary.

4. Two-Year True Own-Occupation

The true own-occupation definition applies only for the two years of your disability. After that, the coverage switches to a modified own-occupation definition till the expiry of the benefit period. 

5. Two-Year Modified Own-Occupation

This type of policy uses the modified own-occupation of total disability for the two years of your disability. When the period expires, the coverage converts to own-occupation. That means after two years, you will receive replacement income only if your disability is so severe as to prevent you from engaging in any gainful occupation. 

In addition to these, some insurers offer adjustable hybrid policies. These policies provide own-occupation coverage for a preset period, such as two years. After the initial period, the coverage converts to any-occupation. 

Before you sign-up for disability coverage, make sure you understand how your policy defines total disability. In the event of illness or injury, the policy’s disability definition could be the difference between your receiving replacement income or not. 

Do I need Own-Occupation Disability Insurance?

Yes, you may need own-occupation disability insurance if you are a skilled professional. A disability that makes it impossible to work in your current field may not preclude you from working in another.

You should also consider own-occupation disability insurance if you work in a well-paying profession and would be unable to work if you suffered a serious injury to a specific part of your body. A plumber, for example, who loses an arm in an accident could still work in another field, but he or she would likely earn less money.

How do you get Own-Occupation Disability Insurance?

You can get own-occupation disability insurance through work or an individual plan. 

• Group disability insurance

Some Canadian employers offer group short-term disability coverage as part of the employee benefits package. However, few offer group long-term disability insurance.

Having said that, if a large number of high-earning professionals work in your organization, it is possible that group own-occupation disability coverage may be available. If so, sign up for it. 

Generally, the employer pays all or a part of the premium. Even if you will bear the entire cost, group policies are cheaper than comparable individual plans. Also, poor health will not prevent you from getting approved because these policies do not involve medical underwriting. 

While enrolling yourself for group disability coverage is a no-brainer, relying only on it may not be a sound strategy. That is because the coverage is usually neither portable nor customizable.

You generally cannot take the coverage with you when you leave employment, nor can you tweak it to meet your specific needs. Another thing to keep in mind is that if you are paying the premiums with pre-tax dollars, the benefits will be counted as taxable income.  

• Individual disability insurance

An individual disability insurance policy is something you buy for yourself, so you can tailor it to your needs. Because you pay premiums with after-tax dollars, the benefits are not taxable. You will have to undergo underwriting though, so approval is not guaranteed. An underlying condition can push up your premium rate or even lead to a denial. 

How to make sure your disability insurance meets your needs

You can customize an individual disability insurance plan to suit your needs by choosing features that provide the most comprehensive coverage within your price range. 

Waiting Period

All long-term disability insurance plans have a waiting period, also called an elimination period. The waiting period is the amount of time you must wait following a disability before you can start collecting the benefits. Usually, the waiting period is 90 to 120 days, but it can be as short as 30 days or as long as two years. 

When you buy disability insurance, you can choose how long the waiting period will be. The longer you wait to collect the benefits, the lower the disability insurance premiums. While a two-year elimination period will reduce the overall cost significantly, you may not have the wherewithal to survive that long.

Therefore, instead of going for the longest waiting period available, pick one that works best for you. 

Benefit Period

Also referred to as the payout period, the benefit period is the length of time for which you will receive the disability insurance benefits. Insurers offer a range of payout periods, from as short as two years to a period that extends until you reach the age of retirement. The cost of disability insurance is inversely related to the length of the benefit period. The longer the benefit period, the higher the premiums. 

Benefit Amount

Disability insurance plans typically replace 60% to 80% of your gross pre-disability salary. If the benefit amount is less than 60%, you will likely not receive sufficient financial assistant if you become disabled. If it is more than 80%, the policy may become unaffordable, increasing the chances of policy lapse. Also, insurance carriers may not let you choose an unreasonably high benefit amount because that could be a disincentive to returning to work. 

Riders

Riders are optional provisions or benefits that you can add to your policy, usually for a small fee. Some riders worth considering when purchasing a disability insurance plan include: 

Non-cancelable provision 

If you choose a non-cancelable provision, the insurer cannot increase your premiums or lower the benefit amount as long as the policy is in force. Generally, it is offered along with the guaranteed renewability provision. 

Guaranteed renewability

It allows you to renew the coverage as many times as you want until you reach a certain age. If you want to renew the policy, the insurer cannot say no. You will not undergo underwriting again or change the terms and features of the contract. However, at each renewal your premium rate will go up. 

Future increase rider 

A future increase rider increases your coverage amount each year to ensure your coverage keeps pace with increased earnings. You will not have to go through underwriting again. 

Basic or enhanced partial disability benefit rider

Both of these riders aim to compensate for income loss if you sustain an injury or develop an illness that restricts your ability to work, but does not make you disabled. These options pay if:

• You are no longer able to perform some duties of your chosen profession
• You productivity is reduced post-disability 
• You cannot work for as many hours as you worked before
• You continue to suffer income loss even after having recovered.

The basic partial disability benefit rider starts if you can work only fewer hours post-disability and/or are unable to perform all of the duties you performed earlier, and suffer a loss of income of at least 20%. The Enhanced partial disability rider, in contrast, issues benefit payments as long as you suffer a loss of income of at least 15% due to disability, even if you resume work full-time. 

Cost of living adjustment (COLA) rider

The COLA rider increases the disability benefit by a fixed percentage each year to offset inflation.  

Student loan protection rider

If you become totally disabled, the student loan protection rider will pay an additional monthly benefit to cover all or part of your student loan payments.  

Return of premium rider

This rider pays you back all or some of your premiums if you never make a disability claim. 

How Much Does Occupation Disability Insurance Cost?

How much you pay for disability coverage depends on a number of factors, such as: 

Age

Younger people are at a lower risk of becoming disabled and hence receive better rates. The older you are when you purchase the coverage, the greater the insurance cost. 

Benefit period

This refers to how long the monthly benefits will be paid. The longer the benefit period, the higher the premium rate will be, other things being equal. A disability policy with a 10-year payout period will cost more than a comparable plan that pays benefits for up to two years. 

Health

Healthy applicants pay lower premiums than those with an underlying health condition, like diabetes or high blood pressure. The insurer also looks at lifestyle factors while setting your premium rate. If you are obese or smoke, you will pay higher rates. 

Coverage Amount 

Disability insurance pays out a percentage (usually 60-80%) of your gross income. That means the more you earn, the more coverage you will need, and the higher your premiums will be.   

Gender

Women pay more disability coverage since they tend to file more and larger claims than men. 

The waiting period

The length of the waiting period is inversely related to disability insurance rates. The shorter it is, the higher the premium rate. 

Occupation 

Your occupation also impacts your disability insurance premiums. If you have a hazardous job, you will pay a higher rate. Or, you may get limited coverage options. 

Conclusion

Under own-occupation definition of disability, the insurer pays you a replacement income if you cannot work in your chosen profession due to disability. This covers you even if you can and do work in another job.

Own-occupation disability policies are more expensive than those that define total disability as any-occupation, but they also offer more comprehensive coverage. Consider buying an own-occupation disability plan if losing the ability to perform in your regular occupation would result in a significant loss of income. 

Frequently Asked Questions

How long does own-occupation disability coverage last?

The coverage period varies by policy. While many long-term disability insurance plans issue benefit payments for two, five, or 10 years, some provide replacement income until you reach the retirement age. Generally, the longer a policy pays the benefits, the higher the premiums. 

Are disability benefits taxable?

Disability benefits may or may not be taxable. You will not get a tax bill if you paid the premiums with post-tax dollars. But if you pay them with pre-tax dollars, any disability benefits you receive will be taxable.  

Is disability insurance coverage based on income? 

Yes, it is. How much disability coverage you can buy depends largely on your gross salary. Most life insurers let you purchase up to 80% of your monthly gross salary, provided you do not have any serious underlying health issues. 

How does own-occupation disability insurance work?

An “own-occupation” policy defines total disability as any injury or illness that prevents you from performing the main and substantial tasks of your preferred profession but not any other job for which you are reasonably qualified.