The point of an insurance policy is that it pools – and therefore dilutes – the risk of having something bad happen. For policyholders, this means that you pay into a plan slowly over time so that you won’t be financially ruined if you suffer from a serious medical problem at some point. Just file a disability claim. Of course, insurers are only able to cover the costs of these calamities because they have a large pool of people paying regularly. So it sort of makes sense that insurers would need to raise rates when more people make claims and collect benefits – their job is to maintain enough funds so that no one’s coverage is ever in jeopardy.
But what about when the insurance company gets themselves into this problem due to their own over zealousness actions or lack of foresight? Should policyholders still have to pay for their mistakes? You might not have an option one way or another.
How Everyone’s Paying for “Own Occupation” Disability
We know how banks overextended themselves and made poor decisions during the recent mortgage crisis, but what’s less well-known is that insurers did something similar a few decades earlier. In an attempt to add new lines of revenue and bolster their existing client base, companies in the ‘80s decided to create a new form of insurance: “own occupation” disability insurance.
It’s very much what it sounds like. These policies said that if people were ever unable to perform their own occupation in the future, the policy would pay out. How specific were these types of disability policies? Very specific. For example, a brain surgeon might find he is unable to continue operating but still start a practice as a general physician and reap the rewards of his policy.
Insurers didn’t mind because they were earning an incredible amount of money from the high interest rates of the time, but when those rates fell and more people came to collect, they found that they’d made a huge mistake. They were paying out more than they were making.
What was their solution? Change their internal claims process so that they were able to deny benefits to more people and terminate more policies. This way, they could collect money from people and then cut them off before having to pay out anything. We’ll get into the methods they use to do that next time. In the meantime, you should check out our free eBook: Disability Insurance Policies. Be sure to stay up to date on new long term disability information through our weekly blogs!