February 14, 2005

A Few Thoughts on Disability Insurance

There's been a lot of publicity lately about private disability insurance. Most of it's negative, stories about insurance companies denying coverage or making claimants wait a long time to collect benefits. A typical article recently appeared in the New York Times (available by subscription only). As I think about it, writing disability insurance -- especially "own occupation" policies which cover people who can no longer perform their current jobs -- is risky business indeed.

Workers compensation is disability coverage for work-related injury and illness. In virtually all states, you are covered if you cannot work. If you can return to any productive employment -- whether or not you can return to your original occupation -- your indemnity benefits are reduced or eliminated. Indeed, in some states, if you have an "earnings capacity," your indemnity benefits can be reduced -- even if you are out of work. If you need training in order to find work within your permanent, work-related restrictions, you participate (sometimes involuntarily) in your state's vocational rehabilitation program.

"Own Occ" Coverage
Some private disability policies have a much narrower focus: you collect benefits if you can no longer perform your original job. In other words, being employable is not the issue. You have to be able to perform your current job. In the above article, a dental hygenist suffered carpal tunnel and other ailments that prevented her from returning to her preferred profession. Under workers' comp, she would be expected to train for some other profession. Under "own occ" disability coverage, which she purchased at her employer's urging, she may be able to collect 60% of her average weekly wage up until retirement age. The policy pays if you cannot perform a specific job. This is a very different take on the meaning of "disability."

Perhaps because of the years of training required to become a professional, private disability insurance is common in the medical field. There are websites devoted to the preservation of income for doctors. Under "own occ" coverage policies, a surgeon who can no longer perform surgery could collect a substantial amount of money for many years, depending upon how the policy is worded. The fact that this highly skilled individual has transferable skills that might lead him or her to become a fabulous administrator has no bearing on eligibility for benefits. For whatever reason, if the doctor cannot perform as a surgeon, his or her disability income for life is assured.

I am not questioning why a doctor would want this coverage. It makes sense. Heck, it makes sense not only for doctors, but for anyone who goes through extensive training to take on professional responsibilities. My question is on the other side: who would want to take on this risk transfer? Who would want to write this kind of business? How would you underwrite a policy where the potential payouts are huge, the definition of disability is exceptionally broad and the premiums relatively small?

"Any occ" Coverage
I am suggesting that the risks of writing "own occ" coverage are too open-ended for my tastes. It seems based upon the peculiar premise that we were put on this earth to do one specific thing only. "Any occ" coverage seems more sensible: if I am disabled from working, I collect benefits. If I can return to some productive work, these benefits are reduced or eliminated. The goal should be to keep people active and productive. Under "own occ" policies, we actually encourage disability, by limiting our vision of what people can and should be doing in the world of work.

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1 Comment

Regarding "own occ" or "any occ" provisions in a disability policy, all of our major disability related insurance arrangements (LTD, WC, Soc Security disability) were crafted during prior generations when career change was less frequent partly because it was difficult, and the payoffs were larger. Also, permanent functional impairments were considered a lift sentence. Today, we are vocationally more mobile and impairmenrts can to a greater impose a much lower barrier to employment.

We need to consider changing all of these disability programs to give greater recognition to career change options. For LTD it means reconsidering what "own occ" means. In workers comp, it means greater allowance for career changes post injury.

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This page contains a single entry by Jon Coppelman published on February 14, 2005 12:02 PM.

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