What Is Own Occupation Disability Insurance?
Disability insurance is an important part of any personal financial plan. It ensures that if you are injured or become too ill to work, your income will be at least partially replaced. Policy options vary, including the length of elimination period or the time you wait to collect. But what is an "own occupation disability" policy?
If you're a high-income earner — such as a doctor, lawyer, or engineer — true own occupation disability insurance allows you to collect monthly disability benefits if you are unable to work at your chosen profession and allows you to work in a different occupation without losing disability benefits. Learn more about the types of policies below.
Types of Own Occupation Disability Insurance
There are three types of own occupation disability insurance policies:
True Own Occupation Disability Insurance
This policy will pay you benefits if you can't work in your chosen occupation, but can work at a different occupation. You would be able to collect a monthly disability benefit and work at a different job with no decrease in your disability benefit.
For example, if a surgeon injured his or her hands and was unable to perform surgery but could teach or conduct research, he or she would be able to collect a disability benefit in addition to a salary from their new job. This type of insurance is the most expensive option, but it might be the choice for high-income earners.
Transitional Own Occupation Disability Insurance
This type of insurance allows you to collect a disability benefit and work at another job. However, it would reduce your benefit by the amount you earn at your other job. In other words, the combination of your monthly disability benefit and the salary you earn from working cannot exceed the amount of income you had from your previous occupation.
Transitional own occupation disability insurance will also reduce your benefit if you receive a benefit from any other disability policy you own.
"Not-Engaged" Own Occupation Disability Insurance
This type of policy is also known as "any occupation" disability insurance and will not pay a disability benefit if you have the ability to perform any kind of work, not just work within your own occupation. In order to collect disability benefits, you would have to be so severely disabled you are unable to work at any job.
The premiums for this type of insurance are less expensive than for the other two types of own occupation insurance but it also replaces less of your lost income. Not-engaged or any occupation disability insurance may not be the best option if you earn a high annual salary.
There are adjustable or hybrid policies that you may want to consider if you're concerned about the cost of premiums. With a hybrid policy, you are able to collect a disability benefit and work at another job for a specified amount of time, for example, two years. After the specified time has elapsed, if you are able to do any type of work, your monthly benefit will cease.
Residual Disability Insurance
If you are partially disabled but still have the capacity to work in your own occupation you may qualify for residual disability benefits. The insurance company would pay you an adjusted benefit based on the degree of your disability. For example, if you are only able to work at your own occupation for two days a week, you could receive 60% of your maximum disability benefit.
There are still other types of disability insurance policy options to consider. These policies include clauses related to renewability or which prevent your policy from being canceled under any circumstances.
Non-Cancelable and Guaranteed Renewal
This policy guarantees your insurance company cannot raise your premium rates and cannot cancel your coverage-for any reason-as long as you continue to pay your premiums.
The insurance company cannot cancel your policy, but may be able to raise your insurance premium based on the following factors:
- State where your policy was purchased
- Year your policy was purchased
- Your occupation
Conditionally Renewable Insurance
This type of policy carries the greatest risk. You may have to pass a medical exam to continue to maintain your coverage. If you do not pass the exam, you may lose your coverage permanently. This policy has the lowest premiums but the highest risk.