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“Better Than Sliced Bread” Really Means No Bread On The Table

In the 70’s and 80’s Individual Disability Income Replacement policies were sold as the most. modern innovative solution to disability insurance coverage. The industry’s agents sold these policies as “better than sliced bread” insuring “own occupation” for the more wealthy self-employed doctors, dentists and business executives. It was surprising to everyone that the result of the sales of IDI own occupation coverage brought the industry to its knees in financial losses.

From 1970-1980, the insurance industry never believed that wealthy professionals would ever file disability claims for secondary gain. After all, the more wealthy businesspersons were honest, and had better ethics than employees covered by ERISA employers. No one ever believed that doctors, dentists, and executives would file fraudulent claims, and therefore, “own occupation” seemed to be a good risk. But, they were wrong!

So-called “own occupation” claims broke the industry with thousands of claims filed after HMOs and PTOs hit the market. Physicians, for example, could no longer afford or manage their practices and, well, just filed for disability. Insurance companies went crazy! And, broke! Imagine…..wealthy professionals were no more honest than anyone else. It couldn’t be….oh, no!

What amazes me as a contract specialist is that agents who sold these polices misled the general public by telling them, “if you can’t do your own occupation you will receive full benefit even if you make $1M doing something else.” This never was true, and I’ll explain why.”

In most IDI policies there are actually TWO definitions of “disability”, one for total disability and one for residual disability. Total disability is defined as, “unable to perform the material and substantial duties of your job”, and the other provides definitions for insureds who are able to return to work in some capacity, not necessarily in their own occupation. Some policies stipulate returning to their own occupation, and some provisions, “your own or any other occupation.”

In addition, agents at the time, mistakenly sold “Residual Disability Riders” defining residual disability and how benefits would be calculated while at the same time popularizing “own occupation” definitions as “better than sliced bread.” Craziness, pure craziness!

In reality, the only true “own occupation” policy is one in which there are no provisions or riders for “residual disability”. Therefore, if an insured is totally disabled and cannot do their job for a period of time, but later returns to work, he/she will in fact receive 100% of the scheduled policy benefit. You can, in fact, do something else, make as much money as you want, and still get your policy benefit.

HOWEVER, if there are residual disability provisions, or residual disability riders, the insured will be expected to prove at least a 20% earnings loss and will be paid lesser benefits using the Proportionate Loss (PPL) formula outlined in the policy. My example is probably over simplified, but it does demonstrate that if your policy contains residual disability provisions, or a residual disability rider, you will not be paid full scheduled benefit if you return to work doing something else.

So, do you have a real “better than sliced bread” “own occupation” policy when there are mentions of residual disability? No, you don’t. If you are able to work in your own, or another occupation, your benefits will be calculated in accordance with the PPL formula in your policy. And, you will have to continue to prove a 20% earnings loss over time. A few series policies drop this requirement after 2 years or so, but my point remains that it’s not a real “own occupation” policy as most insureds understand it.

Just try to explain this to an insured who was “bamboozled” into thinking he bought the best coverage in the industry way back when. Not an easy conversation. However, it doesn’t matter what the insured believes because the insurance company will do as I’ve described above, and what the insured was told when he bought the policy doesn’t matter at all. For some insured’s it’s a really big awakening.

In the end, the “own occupation” product brought several insurers to bankruptcy and the remainder set about devising internal strategies intended to limit the insurance industry’s liability, which could have cost them billions in financial reserve losses. To this day, most of those strategies are still in place as buffer safeguards against costly losses.

If you have an “own occupation’ policy, review it, and find the residual disability provisions or residual riders you paid extra for. Then, you may, along with this blog, have a better understanding of what you would be entitled to if you were partially disabled. Your decisions to return to work may be significantly different.