How to Insure Your Income: Bad Market Assumptions

Insurance companies classify people based on the jobs they do -- their exposure to risk and the probability that a disability will occur.

In the past, insurance professionals generally assumed that most disability claims would come from people in jobs considered high-risk -- such as construction workers, manual laborers, truck drivers, etc. On the flip side, they assumed that people in professional occupations -- such as doctors, lawyers and CPAs -- would make fewer claims. These assumptions were based partly on the work itself; but they also were based on stereotypes about the kind of people who took the jobs.

Insurance underwriters figured that the professional or corporate executive was highly motivated by his or her career. Therefore, they figured professionals who suffered disabling injuries or illnesses would return to work sooner than blue collar types.

Since many low-risk occupations also earned more income, higher amounts of disability income were offered to them, and, conversely, lower amounts of disability income were offered to the high-risk groups. In short, insurance agents and brokers were encouraged to sell high-ticket, big-commission policies to yuppies.

The policies themselves were much more liberal for people in the low-risk, high-pay occupations, too.

Example: The your occupation definition of total disability was very common in these policies -- whereas the any occupation definition applied to people in high-risk, low-pay jobs. Lifetime accident and sickness benefits were available for the low-risk groups, but generally were not available for the higher-risk groups.

Most policies issued to people in the low-risk groups were non-cancellable, which meant that the premiums could not be changed, nor could the policy be cancelled. In contrast, people in the higher-risk groups usually had to buy guaranteed renewable, cancellable or optionally renewable policies. The insurers had an out with these policies.