What is Income Replacement Insurance?
Income replacement is a more common form of own-occupation disability insurance than the traditional offering. Originally, own-occupation disability insurance allowed claimants to continue collecting benefits after an accident, even if they working in another capacity. Unfortunately, people figured out how to game the system and those types of packages are rarely offered anymore.
Now, an own-occupation policy is usually qualified as “income replacement,” meaning that it only pays the benefactor if he/she is not working; a penalty could be incurred they try to work or bring in additional income while on a claim. Sometimes this can be withholding the entire amount of money, other times only a partial amount is delivered to compensate the new income, and other times it just delays the total from being paid out.
Income Replacement vs. Own-Occupation
The advantage of traditional own-occupation disability insurance over disability income insurance is that the claimant can receive the benefits associated with their former job while supplementing that with an additional income from their new position. Most policies will cap this by limiting the total amount earned to not exceed the previous total income.
It is a common misconception that own-occ policies are much more expensive than income replacement. In some cases that is true, but overall it is a false generalization. Most people, given the choice, would prefer to work in one way or another. For own-occupation disability insurance that only covers the difference between the old and new incomes, this option could be better for the provider, and thus better for the client.