Own Occ Or Loss Of Earnings? Heres How They Stack Up
In disability income insurance circles, there is a lot of confusion over which kind of policy is better for your client: Own Occupation or Loss of Earnings contracts.
This article aims to dispel some of that confusion, hopefully putting the debate to rest.
Lets start with some quantifiable parameters. Well use those shown in Chart 1.
The first observation to draw from Chart 1 is that the typical carrier, on average, issued $11,400 a year less than the annual after tax income. (The industry issues a lower amount in order to prevent malingering and this shortfall will rear its ugly head as the scenario unfolds.)
Next, consider what happens when total disability strikes. A CPA can no longer prepare taxes or an attorney can no longer argue–i.e., do the “material and substantial” duties of their occupation. With an Own Occ policy, that fact satisfies the definition for total disability; as a result, the insured can become gainfully employed in another occupation and still be paid the full monthly benefit amount for the DI policy!
For sake of argument, lets say this Own Occ policy also has the optional residual benefit and cost of living adjustment. (Note: In the Loss of Earnings policy, the COLA is already built into the contract as part of the calculation.)
Now lets see how each of the contracts perform–e.g., see which of the two policy types will generate more income in a total disability claim. To do that, well use the following example:
Own Occ. This contract allows the occupationally disabled person to work in another occupation and earn additional income (with no cap) on top of the $4800/monthly benefit. (Note: Beginning with the 13th month, the monthly benefit amount will also increase yearly as a result of the COLA option).
These extra earnings can help close the shortfall gap, or they can even exceed the $69,000 annual after-tax income and the annual (tax free) benefit amount of $57,600. They also provide a replacement for the additional earnings that might have resulted from expanding the insured’s practice beyond the value of the COLA option. (Specific results differ based on the type of Own Occ definition in the contract; these definitions vary from most to least liberal.)
Loss of Earnings. When a claimant in this type of contract returns to work in any occupation and suffers a loss of earnings (or same occupation for Own Occ/residual plans), and when the loss is greater than 20% (some carriers require 25%), the policy pays a proportionate benefit.
However, the claimant must prove the amount of the financial loss for each month benefits are claimed. This proof is in addition to supplying a doctor’s report that in effect verifies the disability caused the loss (and not an economic downturn). The same is true for a residual claim.
When contrasted with an Own Occ total disability claim (which only requires a doctors statement verifying the disability caused the inability to work as a CPA etc.), you’ll obviously conclude that Own Occ claimants have a relatively a hassle-free claim.
Now, see Chart 2 to evaluate how this plays out from a financial perspective.
Obviously, the Own Occ contract has potential financial advantages (in addition to the advantage mentioned above of not having to submit financial documentation).
But, all things being equal, the Loss of Earnings DI policy does have one advantage over the Own Occ: The Loss of Earnings usually costs less.
Conclusion? The lower cost Loss of Earnings contract will, depending on the claim, probably generate a lower total amount of income (benefit amount), both earned and unearned.
Remember: Own Occ total disability claims never require financial documentation. Also, these claims give your disabled client an opportunity to earn additional income (in addition to the monthly benefit)thereby replacing, in a sense, the higher income gains the claimant would have earned had he or she remained at work in a growing practice.
is a disability insurance specialist at Disability Insurance Resource Center, Reston, Va. E-mail him at firstname.lastname@example.org.
Reproduced from National Underwriter Life & Health/Financial Services Edition, February 25, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.