As a disability insurance claims consultant and witness for inappropriately denied claims, I have noticed an increase in the number of denied claims over the past decade. It seems that one of the biggest reasons for claim denial is that the claimant does not satisfy or understand the various own-occupation definitions of "total disability."
Basically, there are three "own-occ" definitions for total disability. One definition is referred to as a "pure own-occ" because it contains no splits (i.e., no "thereafter" wording) and goes for the full benefit period. The other two are split definitions. These do contain that claim-killer word, "thereafter," and are initially "own-occ," eventually changing to a less liberal definition at some point -- usually after five years and for the remainder of the benefit period.
Remember, the policy's definition of total disability usually reads, "unable to do all of the substantial and material duties of your occupation(s)." This is a warning to those who would like to believe that the "own-occ" definitions offer a free ride to retirement. This may be so only if the claimant has one major duty. What happens if the claimant has more than one? Consider the following claim scenarios:
o Claimant can do some, but not all, of their duties
o They are retired and not yet 65
o Their occupation is different at the time of disability than at the time of the application
o During a residual claim, income drops because of economic reasons rather than medical reasons
Does that mean the claimant won't be paid? Let's visit the various definitions and see.
Pure own-occupation definition: no split
"Own-occupation for the full benefit period" is the best of the three types of definitions. It allows the claimant to be paid the full monthly benefit amount for the full benefit period even though the claimant is working in an unrelated occupation/duty. The definition looks at the occupation(s) being performed at the time of claim, not at time of application. This definition is available from most carriers and is offered primarily to white-collar workers, especially those who have a large investment in their education or some other criteria the carrier has set forth, based on claims experience and, to some extent, the competition.
Under the dual occupation/duty scenario, the claimant must be disabled to the point where they cannot perform both occupations in order to collect payments under total disability. However, if they're not disabled from both duties and have a residual benefit option as part of their coverage and at least a 20 percent loss of income, they should then be able to collect some monthly benefit amount under this option. Most residual benefit contract language also includes benefits for partial disability, which requires only a loss of duties, as opposed to a loss of income, to trigger benefits and pays a minimum of 50 percent for the first six months. Under a dual occupation/duty scenario in which the claimant doesn't qualify for total disability, one would believe that the residual benefits would take care of things -- and they will, but possibly only for six months. What, then, happens after six months if the claimant's income hasn't dropped? This might occur if they are able to transfer lost income from one duty to the remaining one, which then results in no loss of income. Remember, after the first six months, in order to collect residual benefits, there must be a loss of income.
Own-occupation split definitions
There are two basic types of own-occ split definitions. One type involves "own-occupation" for a period of time, which then changes to "not gainfully employed elsewhere." A policy with this definition initially pays out whether the insured is working or not. It continues to pay for the rest of the benefit period if the insured can't perform the duties of their occupation and is not working elsewhere. It becomes the claimant's choice whether or not to work. Again, residual can be a factor.
The other type of split definition involves "own-occupation" for a period of time, which then changes to "unable to work elsewhere." This split definition gives a true "own-occ" for a period of time, usually for five years, then changes to "unable to work elsewhere" by reason of education, training, and experience. Some carriers include prior income as another factor. This type of split definition gives the carrier more control over the claim by challenging the claimant's ability to work at the end of the own-occ period. As above, residual can be a factor.
The other type, the "loss of earnings" definition, has been around for a long time. Recently, more carriers have chosen to stipulate this definition in lieu of any of the own-occ definitions.
A "loss-of-earnings" definition may be more appropriate and less expensive given the dual occupation/duty comments above, whereby your client may have two known yet unrelated
occupations/duties.
This definition works the same as a residual (proportionate) benefit. This means that an insured who has a 30 percent loss in income during a covered disability receives 30 percent of the monthly benefit (partial notwithstanding).
Be aware that since participation tables allow only 30 to 60 percent of earned income to be covered -- depending on the insured's income, occupation, and policy issue date -- the insured starts off with an initial 40 to 70 percent monthly benefit amount shortfall. As a result, any of the above "own-occ" defini-tions then become even more desirable as a result of allowing the insured to earn additional income as long as it comes from another occupation or duty.
In some cases, higher issue limits are available if the employer pays the premium, thus resulting in these benefits being taxable, in contrast to tax-free benefits when the employee pays the premium.
The "own-occ" definition is more expensive than a "loss-of-earnings" definition, but on the other hand, it can make the claims underwriting process somewhat easier since it may not require the claimant to provide documentation in order to prove a monthly loss of income.
That's not to say that the claims department won't ask for tax returns and the like. The rest is up to you to point out misconceptions to clients and eliminate unreasonable expectations.
Larry Schneider is owner of Disability Insurance Resource Center. He can be reached at info@di-resource-center.com or 800-551-6211. For more information, visit www.di-resource-center.com.
