United States
Hong KongDisability insurance: the definition is the policy
Whether a policy pays turns on the occupational definition. Own-occupation pays if you cannot perform your own occupation; any-occupation only if you cannot perform any suitable work. Benefits are tax free where the individual paid the premium with after-tax money.
The most underinsured risk in most financial plans, and the one where contract wording decides everything.
The definitions
| Definition | Pays when |
|---|---|
| Own occupation | You cannot perform the material duties of your own occupation, even if working elsewhere |
| Modified own occupation | You cannot perform your own occupation and are not working elsewhere |
| Any occupation | You cannot perform any occupation for which you are reasonably suited by education, training and experience |
| Split definition | Own occupation for an initial period, then any occupation |
Own-occupation is the strongest and the dearest. Any-occupation is the weakest and pays least often. Read the definition.
A surgeon who can no longer operate but could teach is covered under own-occupation and not under any-occupation. That example, or a version of it, is the standard exam question.
The other terms that matter
- Elimination period. The wait before benefits begin - 90 days is common. Longer means cheaper, and it must be matched against the emergency fund.
- Benefit period. How long benefits last - two years, five years, to age 65, or to age 67.
- Residual or partial disability. Pays proportionally where you can work but earn less. Genuinely important and often omitted.
- Non-cancellable. The insurer cannot change premiums or terms. Stronger than guaranteed renewable, where premiums can rise by class.
- Cost of living adjustment. Benefits increase with inflation during a claim.
- Future increase option. The right to buy more cover later without medical underwriting.
The elimination period connects directly to the emergency fund, which is a favorite integration point: a 90-day elimination period requires roughly three months of reserves to bridge.
Taxation decides the amount
If the individual pays the premium with after-tax dollars, benefits are received tax free. If the employer pays and does not include it in income, benefits are taxable. Who paid decides it.
That is why group cover replacing 60 per cent of income may replace considerably less after tax, and why an individual policy at the same nominal percentage provides more.
A client has employer-paid group cover at 60 per cent of income. How much are they actually receiving after tax, and what does that mean for a supplemental individual policy? That is the shape the exam uses.
How much
Insurers typically cap cover at 60 to 70 per cent of earned income, deliberately, so that a claimant has a financial reason to return to work. That gap is deliberate.
You cannot insure 100 per cent, and a question suggesting full replacement is describing something the market does not offer.
Dollar limits here are indexed annually and several were changed by recent legislation. Confirm the current figure before relying on it, and expect the exam to test the rule rather than the number.
Common questions
What is the difference between own-occupation and any-occupation?
Own-occupation pays if you cannot perform your own occupation, even if working elsewhere. Any-occupation pays only if you cannot perform any work you are reasonably suited to, and pays far less often.
What is an elimination period?
The waiting period before benefits begin, commonly 90 days. A longer period costs less and must be matched against the client's emergency fund.
Are disability benefits taxable?
Tax free where the individual paid the premium with after-tax dollars. Taxable where the employer paid and did not include the premium in income.
Why can you not insure 100 per cent of income?
Insurers cap cover at around 60 to 70 per cent deliberately, so that a claimant retains a financial reason to return to work.
What is residual disability cover?
A benefit paid proportionally where the insured can work but earns less than before. It is genuinely important and frequently omitted from policies.