Definition of Disability

Total Disability

While a disability income insurance policy's renewability provision dictates how long an insured may keep his or her policy and at what premium, it is the policy's definition of disability that determines whether or not benefits are payable in any specific instance.  

We are going to change our focus now to a consideration of the various definitions of disability that are used in disability income insurance policies.  As we look at each of these definitions, it is important to note that the loss of income is only important if the definition of disability requires income loss.   Although that statement may sound like legal gibberish; it isn't.  Except in rare cases, the various definitions of total disability in many disability income insurance policies do not require a loss of income for benefits to be payable.  

We will begin our consideration of the definitions of disability with a look at total disability.  There are three different definitions of total disability.  These three definitions are known as:

Own Occupation
Limited Own Occupation
Any Occupation


 Own Occupation

The definition of disability that provides the greatest protection for the insured -- and is the one under which it is easiest to obtain a total disability benefit -- is the own occupation definition.  Under this definition, the insured is considered disabled when he or she is:

unable to perform the duties of his or her own occupation

Under a pure own occupation definition of total disability, the insured is considered totally disabled if, as a result of accident or sickness, he or she can't perform the substantial and material duties of his or her regular occupation -- even if employed doing something else!

An example of the pure own occupation definition of disability can clarify it.  Let's assume that the insured is a surgeon.  As a surgeon, his occupation consists of the surgical treatment of disease.  Let's further assume that his income is $25,000 per month, and that he purchases a $10,000 per month disability income policy with a lifetime benefit period.

Shortly after the policy is issued and in force, the surgeon develops a tremor in his hands.  Since the hand tremor is likely to cause prospective patients to seek a different surgeon, it makes his continued practice of surgery impossible.  Because the surgeon satisfies the pure own occupation definition of disability in his policy, he begins to receive a $10,000 monthly disability income benefit.

Since the surgeon's practice has ceased because of his hand tremor, he decides to find other employment in the medical field.  As a result, he applies for and is accepted into a residency program in anesthesiology.  

Throughout the residency program, the former surgeon receives both his resident's income and his monthly disability income benefit of $10,000.  At the conclusion of the residency program the insured, still afflicted with the hand tremor, joins an anesthesiology group practice, and, within a few years, his income is greater than it was as a surgeon.  Since his disability income insurance policy insures his ability to practice surgery, he continues to receive his $10,000 per month disability income benefit.

There is little question but that our surgeon-insured constitutes an unusual case.  This unusual set of claims circumstances, however, is presented for two reasons:

To show the extraordinary protection afforded by the own occupation definition of disability  
To demonstrate the irrelevance of the insured's earned income to that definition

This pure own occupation definition of disability is often limited to insureds in those occupation classes that are generally deemed to involve very low disability risk by the industry.


 Limited Own Occupation

A variation of the pure own occupation definition of disability that avoids the claims result we saw in the case of the surgeon turned anesthesiologist is known as a modified own occupation definition. The modified own occupation definition of total disability states that the insured will be considered totally disabled if he or she is:

unable to perform his or her own occupation and not engaged in any other occupation.

In our example, if the surgeon's disability income policy contained this modified definition, his benefit would probably have been reduced when he entered the residency program and ceased when he joined the anesthesiology group.  

This modified own occupation definition of disability presents the insured with a choice at the time of disability -- to enter a different occupation and risk the loss of the total disability benefit or remain disabled and unemployed.  Generally, for the insured's benefit to cease, the insured must have entered an occupation that is considered reasonable in light of his or her education, training or experience with due regard to prior income.  Therefore, in the case of our surgeon, his decision to become a clerk would probably not affect his disability income.  His choice to become an anesthesiologist, however, would certainly cause his disability income to cease.

The benefit of this modified own occupation definition to the insured lies in somewhat lower premiums.  

A pure own occupation definition of disability clearly gives the insured the greatest chance of maintaining a successful disability claim.  It is a definition that is generally restricted to professional occupation classes.  The second type of total disability definition is one that provides some of the benefits of an own occupation definition while giving insurers a certain amount of claims relief.  

Under a limited own occupation definition of total disability, the definition of what constitutes total disability changes with the duration of the disability from a pure own occupation definition of disability to an any occupation definition.  As the disability continues, its definition becomes more restrictive.

The language of a typical limited own occupation definition of total disability is normally couched in the following terms:

The insured is disabled if unable to perform the duties of his or her own occupation for the first 24 months of disability; following such 24-month period, the insured will be considered totally disabled if unable to perform any occupation for which he or she is fitted by education, training or experience.

This limited own occupation definition of total disability is unquestionably inferior to the pure own occupation definitions.  As such, it usually appears on policies designed for sale to applicants in the higher risk occupation classes.

If the surgeon/anesthesiologist in our earlier example had a limited own occupation definition of total disability on his policy, his benefits would have ceased at the end of the 24-month own occupation period since he was in an anesthesiology residency program at that time.  

However, what would have been the result if the disabled surgeon elected to remain unemployed rather than entering an anesthesiology residency program?  In order for his benefits to continue beyond the 24-month own occupation period, it would have to be certified that he was unable to engage in any occupation for which he was fitted by education, training or experience.  Since his tremor might not keep him from being a teacher in a medical school, his continuation in a claim status might easily be in jeopardy.

As we can see, the limited own occupation definition of total disability became much less favorable to the insured once the 24-month period had expired and the insured was required to meet a more restrictive test a disability -- the any occupation test.  This brings us to our final definition of total disability.


Any Occupation

The total disability definition providing the least protection for the insured is the any occupation definition.  Under the any occupation definition of total disability, the insured must be unable to engage in any occupation in order to be considered totally disabled.  In the case of our surgeon, a strict construction of the any occupation definition of disability would have caused his benefits to cease even if he were to take a part-time job sweeping streets.

The language of an early any occupation definition of total disability was usually couched as follows:

The insured is disabled when, as a result of sickness or accident, he or she is unable to engage in any occupation for remuneration or profit .

Under this any occupation definition, a disabled insured would continue to be considered disabled only if he or she did not engage in any occupation and was unable to engage in any occupation for remuneration or profit.  In this strict construction, a disabled professional who was considered capable of re-entering the job market in the most menial of positions would lose his benefits.

Over time, the courts have added important qualifying language to this definition that avoids some of its harsher consequences.  As a result of this judicial tinkering, the any occupation definition of total disability has changed to the following:

The insured is disabled when, as a result of sickness or accident, he or she is unable to engage in any occupation for remuneration or profit for which he or she is fitted by education, training or experience.

Insurers have generally changed their policy language to reflect these court-mandated changes in their definition of disability.

The any occupation definition of total disability is ordinarily reserved for policies designed for sale to those insureds in the highest risk occupations.  Although an insurer could certainly design a disability income policy for sale to professional or managerial occupation class applicants with this definition of total disability, it would be unlikely to do so.  While it could afford to sell it at a lower premium, the currently competitive nature of the marketplace would probably result in their being unable to sell it at all.

The Social Security Administration uses a variation of the "any occupation" definition to determine whether a claimant is entitled to Social Security disability benefits.



 Income Replacement Policies

We noted at the outset of our discussion of disability definitions that the loss of income is important only if the definition of disability requires it. And, except in rare cases, the various definitions of total disability do not require a loss of income for benefits to be payable.  Let's look at the exception -- income replacement.

During the decades of the 1960s and 1970s, many smaller insurance companies whose flagship products were life insurance products looked for a way to diversify their product line and augment their bottom line.  Offering a disability income insurance product was seen as a way to do that, and a significant number of small to medium size life companies entered the disability income business.  

It wasn't long before they began feeling the enormous financial swings caused by incurred claims in this product line due to the relatively small book of existing disability income business.  The additional competitive enhancements made to the product line -- a lifetime own occupation definition of disability, for example -- made the financial problem worse.  The time seemed to be right for a solution.  

The product that was offered as a solution to the roller-coaster financial swings experienced by the small book of disability income business of many new sellers of the product was an income replacement policy.  Interestingly, this is a product that doesn't even have a definition of disability!

This product -- by providing a benefit only if the insured suffers an income loss -- resolves the concern voice by some insurers about the possible abuse of the own occupation product.  The abuse these companies were concerned about was the one discussed in our earlier example of the physician turned anesthesiologist.  If you recall, the insured suffered no continuing income loss but, nonetheless, continued to receive disability income benefits.  

The typical income replacement policy pays a monthly income benefit that is equal to the percentage of income lost by the insured as a result of sickness or accident multiplied by the maximum monthly income benefit.  

For example, an applicant with a monthly income of $10,000 might qualify for a $6,000 per month income replacement benefit.  If, as a result of sickness or accident, the insured's income reduced in a particular month to $7,000, he or she would have sustained a 30% income loss.  The $6,000 maximum monthly benefit would be multiplied by 30%, and the benefit paid for that month would be the result -- $1,800.

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Monthly Income Replacement Policy Benefit Calculation -- Example


Prior Income:
$10,000
Maximum Monthly Policy Benefit:
$6,000  
Reduced Income Due to Accident or Sickness:
$7,000

1.  Determine monthly income loss:

     $10,000 - $7,000 = $3,000

2.  Calculate lost income percentage:

     $ 3,000    = 30%
     $10,000

3.  Calculate monthly benefit:

     $6,000
       X 30%
     $1,800
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Each month, the benefit that is payable under the income replacement policy is recalculated based upon the insured's income in the previous month.   The required minimum income loss that must be sustained by the insured in order to qualify for a benefit is 20%.  

Of course, if the insured suffered a complete income loss in a particular month, a benefit equal to 100% of the maximum monthly benefit would be payable.  In some income replacement policies the insured's sustaining an income loss greater than 80% is considered total, and the maximum monthly benefit is paid.

This income replacement benefit calculation, as we will see, looks strikingly similar to the calculation of the residual disability benefit that is available under many disability income policies.  The primary difference between the residual benefit in a disability income policy and an income replacement policy is that the insured need suffer no loss of time or duties to receive a benefit in an income replacement design.  All that is required is that the insured suffer an income loss as a result of an accident or sickness.  

Income replacement policies continue to be available.  They offer a generally less expensive alternative to the individual's need to provide against the devastating effects of income loss.


 Non-Total Disability

For the most part, we have been discussing a particular kind of disability -- total disability.  It should be clear, however, that not every disability is total.  In fact, most disabilities are not total disabilities at all.  Instead, they involve a partial disability during which the individual may be able to do some of his usual duties but not all of them or may not be able to perform them for the same length of time.

There are two approaches that insurers take in their policies for dealing with non-total disability, and these approaches may be incorporated in their basic policy or provided by rider.  They are:

· Partial disability
· Residual disability


Partial disability benefits

Partial disability benefits are usually found in policies offered to insureds in the higher risk occupations; conversely, residual disability benefits are typically provided in policies issued to insureds in the managerial and professional occupations.  Not unexpectedly, residual disability benefits generally provide more complete coverage.

Partial disability benefits require that the insured be unable to perform one or more of the duties of his or her regular occupation as a result of accident or sickness, but there is no requirement that the insured suffer any income loss.  

The benefit payable under a partial disability benefit is usually a fixed percentage of the total disability benefit for the duration of the partial disability up to a maximum period.  The maximum benefit period is usually 6 months, and the maximum benefit is typically 50% of the policy's total disability benefit.  

The partial disability benefit structure is a simple one.  It offers insureds a fixed benefit for a fixed, but very limited, period.  As we will see, the approach taken in the case of residual disability benefits is quite a lot more complex as well as being far more responsive to the insured's needs.

If partial disability benefits are simple in design, residual disability benefits are considerably more complicated and look very much like the income replacement concept we discussed just a moment ago. Residual disability benefits pay a monthly disability income that is generally equal to the insured's lost income percentage multiplied by the policy's benefit for total disability.  



Residual Disability Income

As we know, products generally evolve over time; they usually are introduced providing simple, relatively straightforward benefits.  As consumer interest builds and other suppliers enter the market, additional bells and whistles are added that both complicate and expand the coverage.  Similarly, the residual disability income provision has become increasingly liberal in response to competitive pressures.

At the time of introduction, three important criteria had to be met in order for the insured to receive a residual disability benefit:

The insured had to be unable to perform one or more of the important duties of his or her regular occupation or be unable to perform those duties for the same amount of time, that is, the insured had to have a loss of time or duties.

The insured had to suffer an income loss of at least 20%.  

The residual disability had to have been preceded by a period of total disability for which a benefit was payable.

As long as the insured continued to suffer a loss of time or duties and a 20% income loss following a period of total disability, a residual disability benefit was payable.  And, that benefit could be payable for the entire benefit period.  

The competitive pressures alluded to resulted in an improvement of the residual disability benefit by the addition of several major enhancements.  

The minimum monthly residual disability income benefit for the first six months was increased to 50% of the monthly benefit for total disability, even though the insured only suffered a 20% income loss.

The insured would receive the total disability monthly benefit in any month in which he or she suffered an income loss of more than 75%.

The monthly residual disability benefit became sensitive to the consumer price index (CPI); this resulted in the insured's receiving an increased monthly residual disability benefit over time even though suffering no increased income loss.

The loss of time or duties requirement was eliminated, and the benefit became contingent only upon a 20% or greater income loss.

Key Provisions Of Residual Disability Benefits

1.  Basic Residual Benefit Formula

A)  Year 1

(Prior Income - Current Income)   X  Total Disability Benefit  =   Benefit
          Prior Income

     B)  Year 2 & Later

((1+CPI) X Prior Income) -Current Income X Total Disability Benefit = Benefit
          Prior Income

2.  Benefit Trigger

Income loss of at least 20% as a result of accident or sickness.  Some policies require a loss of time or duties either throughout the benefit period or only during the elimination period.

3.  Minimum Benefit 1st 6 months

Minimum benefit for first six months is usually 50% of the total disability benefit, even though the insured experienced only a 20% income loss.  

4.  Less Than Total Income Loss Considered Total

A loss of income greater than 75% is often considered the same as total disability.

5.  Prior Total Disability Not Usually Required

Although some earlier policy forms required that the insured experience a period of total disability before residual disability benefits were payable, this requirement has been eliminated from most policies being offered.



 Recurrent Disability

Recurrence is an unfortunate characteristic of many serious disabilities.  Fortunately, disability income insurance policies contain a recurrent disability provision to deal with that problem.  

The typical recurrent disability provision provides that a subsequent disability occurring within a specified period -- usually 6 months -- following a prior disability from the same or a related cause is considered a recurrence and a continuation of the earlier disability.  Remember, both criteria must be met.  For the disability to be recurrent the subsequent period of disability must:

1.  begin again within 6 months following a prior period of disability and
2.  be from the same or a related cause.


Disabilities that are deemed to be recurrent disabilities:

Do not require that the insured meet a new elimination period  
Continue the earlier benefit period.

In the vast majority of cases, the recurrent provision works to the benefit of the disabled insured.  Since the elimination period doesn't apply to these recurrent periods of disability, benefits begin to accrue immediately.  However, since the earlier benefit period is resumed, the recurrent disability provision may provide a shorter benefit for this subsequent disability.  Let's consider an example.

Suppose that an insured owns a disability income insurance policy with a relatively short benefit period -- a 2 year benefit period, for example.  Further suppose that the insured's initial period of disability lasted for 18 months.  If the insured had continued to be disabled, he or she would have received benefits only for the remaining 6 months in that benefit period.  

If a subsequent period of disability is deemed to be recurrent under the recurrent disability provision, the insured would be limited only to the remaining 6 months of benefits.  Of course, if the disability were not considered recurrent, that is if it were considered a new disability, the disabled insured would be able to collect benefits for up to an additional 2 years -- rather than only for the remaining 6 months.