This is the third in a series on disability insurance.  Part one can be found here and part two here.

Disability insurance differs from life insurance in numerous ways, but none is more significant than in defining exactly when you become disabled (and when you become enabled again.)  The broader a definition of disability you get in your policy, the more the policy will cost.

Own-occupation, Specialty-specific

Probably the most important aspect of the definition for doctors is that it be specific to your occupation.  For instance, if I lost my left thumb, there are a number of procedures in emergency medicine that I would no longer be able to do.  I would be completely disabled from managing a busy emergency department by myself.  But I could probably still go do urgent care work.  A specialty-specific definition of disability in my policy would provide me my full disability payments in addition to the money I make at the urgent care.   Sometimes the “specialty-specific” clause is inherent to the policy, and at other times it is an additional rider (piece of paper added to the policy for which you pay an additional premium).  Either way, you almost surely want to get this in your policy.

Here's the way the clause reads in my current policy (Standard Insurance):

Total Disability/Totally Disabled – Because of Your Injury or Sickness:

1. You are unable to perform the substantial and material duties of Your Regular Occupation; and

2. You are not engaged in any other gainful occupation

The definition of “Regular Occupation” in the policy reads this way:

Regular Occupation – Your occupation at the time Disability begins.  If You have limited Your practice to a professionally recognized specialty in medicine or law, the specialty will be deemed to be Your Regular Occupation.

If you read the above carefully, you'll notice that the policy won't pay me if I am able to go work at an urgent care or some other job – i.e. “engaged in any other gainful occupation.”  Because I wanted a stronger definition of disability, I purchased an “Own Occupation Benefit Rider” which says this:

This rider changes the definition of Total Disability/Totally Disabled in the policy's DEFINITIONS section to read as follows:

Total Disability/Totally Disabled – Because of your Injury or Sickness:

1. You are unable to perform the substantial and material duties of Your Regular Occupation

That particular rider costs me about $455.70 per year, or about 0.5% of the income protected ($7500/month).  The whole policy costs me about 4% of the income protected, so this particular rider is responsible for about 13% of the cost of the policy.  Is it worth it?  I thought so.

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Mental Disorders/Substance Abuse

Many policies will only cover mental illness or substance abuse related disabilities for a period of two years.  I know an attorney who became unable to practice law due to developing bipolar syndrome in his 30s.  It took over a decade to get it under control. He had a policy that covered mental illness indefinitely, which prevented financial catastrophe from striking him and his family.  You'll need to decide whether this is a risk you're willing to run or not.  If you want mental illness covered like every other illness, you'll be paying more.  I opted not to pay for this in my policy, but I based that decision on my personal history of mental illness (or rather lack of it), a lack of family history, and the fact that I don't smoke, drink, or use drugs and don't plan to start any time soon.  So my policy only covers 2 years.

Presumptive Total Disability

As you well know, disability can be defined in many shades of gray.  In the event of your disability, you can expect a bit of a paperwork fight between you, your physician, and the disability insurance company.  However, most policies contain a section that defines “presumptive total disability” where you can be assured there won't be much arguing from the insurance company.  My policy reads like this:

Presumptive Total Disability – Your total and permanent loss, because of Your Injury of Sickness, of one of the following:

1. Speech;

2. Hearing in both ears, not restorable by hearing aids

3. Sight in both eyes (see below);

4. Use of both hands;

5. Use of both feet; or

6. Use of one hand and one foot.

Total and permanent loss of sight in both eyes means: Both eyes must measure at or below 20/200, after reasonable efforts are made to correct their vision, using the most advanced medically acceptable procedures and devices available.

Anything short of that, and you're going to have to get your doctor to certify your disability and get the insurance company to accept it.  At times this can involve visits to multiple specialists and even hiring an attorney.

Cosmetic Surgery/Transplant Surgery

Some policies will cover you if your disability is the result of cosmetic surgery or the result of donating a kidney or other body part to someone else.  Mine happens to cover this.  Be aware that some may not.  Read the fine print.

Exclusions and Limitations

We discussed many of these in part two, but keep in mind that most policies do not cover you if your disability is the result of you committing a felony, your active participation in a riot, disability occurring while you are in jail, or an intentionally self-inflicted injury.  So if you're going to try to commit suicide, realize that while your life insurance will probably pay (at least after the first two years of the policy), your disability insurance isn't going to pay if you only manage to disable yourself.

Residual Disability

Residual disability refers to being only partially disabled.  This may occur from the initial injury or illness, or be part of the process of recovery.  You generally need to buy an additional rider to cover this.  Read this rider carefully, it can be a bit complicated.  My definition of residual disability is listed here:

Residual Disability/Residually Disabled – Residual Disability means You are not Totally Disabled, but because of Your Injury or Sickness:

1. Your Monthly Earnings are reduced by 20% or more of Your Indexed Prior Monthly Earnings; and

2. You are under the regular care of a Physician appropriate for Your Injury or Sickness; and

3. You are able:

a. To do some, but not all, of the substantial and material duties of Your Regular Occupation; or

b. To do all of the substantial and material duties of Your Regular Occupation, but not for as long a time or as effectively as You did immediately prior to Your Injury or Sickness.

Imagine developing painful lumbar radiculopathy that keeps you from working more than 20 hours a week.  This is the part of your policy that will cover that.  This rider will also explain how much you get if you are partially disabled.  My policy pays the whole benefit (total disability) if I can't earn at least 20% of my “indexed prior monthly earnings”, which is basically the money I earn at my job.  It doesn't count my investments, other disability income policies, rent from a rental property, or my nonvocational activities (like this blog.)  It doesn't pay anything if my earnings aren't reduced at least 20%.  If I am making between 20% and 80% of what I made previously, I get the total disability benefit times the ratio of my loss of income for that month divided by my indexed prior monthly earnings.  An example:

Say a physician earns $20,000 a month.  He has $7000 of that income covered by disability insurance.  He becomes partially disabled, such that he can only make $15,000 a month.  Since this is more than a 20% loss, the residual disability rider kicks in.  His loss of income is $5000.  Divided by the indexed prior monthly earnings of $20,000, the ratio is 0.25.  Multiply 0.25 by the $7000 benefit, and he gets $1750, for a total income of $16,750.  That will help soften the blow a bit.  If the physician had $15,000 of income covered by disability insurance, he would have the same ratio, but would multiply it by the $15,000 benefit, giving him a disability payment of $3750, for a loss of income of only $1250 a month from his previous amount.  Like with most aspects of disability insurance, you get what you pay for.

The good news is that just like you (hopefully) your disability insurance company wants you to go back to work full-time.  So part of this rider is usually a recovery benefit.  My policy will give me a lump sum of up to $45,000 (6 times the basic monthly benefit) to go back to work after being partially disabled.

A residual disability rider isn't as expensive as the last rider we discussed.  On my $7500 policy I pay about $241.45 per year, or about 0.27% of the income protected, or about 7% of the cost of the policy.

In part four I'll discuss some other important riders to have on your policy including future purchase options, cost of living riders, and the noncancelable policy rider.

What do you think? How important is the definition of disability to you? Comment below!