Clients often tell me they don’t need disability insurance because they are not accident-prone. However, it may surprise you that only 14% of disability insurance claims are caused by injuries. Most are caused by illness. The ratio of claims due to illness is six times more likely to come from illness.

Here are some recent claims filed with a major insurance carrier:

• 2 Lumbar Laminectomies
• Acute Myocardial Infarction
• Alzheimer’s Disease
• Angina Pectoris, Coronary Artery Disease
• Anxiety Disorder, Depression
• Brain Tumor
• Cancer of Lung
• Carcinoma Lung
• Cerebral Aneurysm
• Cervical and Lumbar Back Sprain
• Coronary Artery Disease
• Crohn’s Disease
• Degenerative Arthritis Both Hands
• Degenerative Disc Disease
• Diabetic Neuropathy, Lower Extremities
• Left Brachial Plexus Compression Syndrome
• Lou Gehrig’s Disease (ALS)
• Lumbar Disc Disease Right Laminectomy
• Lumbar Nerve Root Irritation
• Multiple Sclerosis
• Multiple Trauma
• Myocardial Infarction, Coronary Artery Disease
• Neuropathy, Collagen Disease
• Obstructed Right Lateral Ventricle, Seizures
• Pancreatitis, Neuropathy, Diabetes, Angina
• Parkinson’s Disease
• Post Traumatic Stress Disorder
• Severe Coronary Artery Disease
• Severe Headaches, Anxiety
• Thoracic Outlet Syndrome
• Uncontrolled Diabetes

One of the most important definitions in a long term disability policy is the definition of total disability. How the insurance company defines total disability can make a huge difference in how much and how long your benefits will be paid.

Many professionals rightly seek out an Own-Occupation (Own-Occ) disability policy to protect their hard-earned incomes. However, when is Own-Occ truly Own-Occ? Many companies advertise their disability policies as Own-Occ policies and the unsuspecting consumer often considers them to all be the same.

A true Own-Occ definition will look something like this:

Total disability means that, solely due to injury or sickness, you are not able to perform the material and substantial duties of Your Occupation.

Some companies modify this definition by adding words such as and are not engaged in any other gainful employment to the definition. We call the former definition a True Own-Occ definition and the latter a Modified Own-Occ definition.

While the addition of those few words seems like a minor adjustment to the definition, the difference in benefits paid can be substantial. For example, let’s say a surgeon with an annual income of $350,000 has a disability policy with a monthly benefit of $10,000. She permanently injures her hand and can’t perform surgery anymore. As she is still generally healthy, she goes into private practice and earns $120,000 annually.

If her disability policy had a True Own Occ definition, her earnings would be $240,000 ($120,000 income plus $120,000 disability benefits) annually (of which $120,000 would be non-taxable). If her policy had a Modified Own-Occ definition, her annual income would be $120,000.

Which definition would you choose?

I speak with many prospective clients who consider self-insuring against disability (e.g. relying on savings, spousal income and/or credit). In every one of these cases, these individuals all make the following two mistakes:

• They minimize the degree of the risk (i.e. how likely it is that they will become disabled) and;
• They underestimate how financially exposed they would be if they were to become disabled.

In regard to the first point, most people consider that a permanent disability is something that will never happen to them. However, the statistics tell us otherwise.

• If you’re under age 35, chances are one in three that you will be disabled for at least six months during the course of your career.
• Men have a 43% chance of becoming seriously disabled during their working years.
• Women have a 54% chance.
• At age 42, it is four times more likely that you will become seriously disabled than that you will die during your working years.

Regarding the second point, if, at age 40, you are earning $200,000 per year and you were to become permanently disabled, the loss of income (without factoring in inflation or increased earnings) would be $4,000,000 through age 65 (the typical term of a long-term disability policy)

Self-insurance works when it comes to handling predictable, low-percentage-type risks that carry modest financial exposure. However, the risk of disability is quite unpredictable and, as you can see from the above information, it is a relatively high-percentage-type risk that carries much less-than- modest exposure.

You can choose to retain the risk (self-insure) or to transfer the risk by purchasing a long-term disability policy. When presented with these facts, most of my clients choose the latter.