Occupational disability insurance: What is it and what should you look out for?

It took a long time... But if a man says he will do it, he will do it, you don't have to remind him every 6 months! Nevertheless: Sorry for the long waiting time... The last months were very exhausting and unfortunately I didn't have the peace to dedicate myself to the post you wanted. Since the topic came up here again recently, I took the time over the weekend. I hope a few of your questions will be clarified 🙃

Overview:

1. what is occupational disability insurance?

2. how does occupational disability insurance work?

3. why the disability pension is not enough!

4. why is occupational disability insurance important?

5. what does occupational disability insurance cost?

6. what should one pay attention to when taking out an insurance policy?

7. how does the application process work?

8. does it make sense to combine occupational disability insurance with old-age provision?

9. taxation of the occupational disability pension

10. when should the occupational disability insurance be taken out?

11. conclusion

1. what is occupational disability insurance?

Imagine you could no longer work in your profession for health reasons - how would you then finance your livelihood? This is where occupational disability insurance comes into play: It pays you an agreed monthly pension until a certain age specified in the contract (usually until retirement).

How does occupational disability insurance work?

Basically, occupational disability insurance works quite simply: You take out a contract and pay a monthly premium to the insurance company. In the event that you are no longer able to perform your profession for at least 50% of the time (probably) for more than six months, the company will pay you the agreed monthly occupational disability pension.

This insurance is a so-called "risk insurance". It can be compared with car insurance, for example: You receive a benefit if something goes wrong, i.e. in the event of a claim. But if everything goes smoothly and you stay healthy until the end of the contract, no money is paid to you - just like your car insurance if you drive accident-free.

3. why the reduction in earning capacity pension is not sufficient!

There is a state pension for reduced earning capacity, so why take out occupational disability insurance?

The reduced earning capacity pension is linked to certain conditions:

• You must have paid into the statutory pension insurance for at least five years.
• In the last five years before the onset of the reduction in earning capacity, you must have paid your compulsory contributions to the German pension insurance for at least three years (in total, not at a stretch).
• Your ability to work (the ability to perform ANY work) must be either less than three hours (full reduction in earning capacity) or between three and six hours (half reduction in earning capacity) per day.

The amount of the reduced earning capacity pension is individual and depends on your personal pension entitlement, so I can't give you a general amount. Take a look at your last pension statement (this onion paper, which comes once a year with the mail). Nevertheless, here are a few figures: According to information from the German pension insurance, the average pension for reduced earning capacity for existing pensions is 933€ per month (as of 01/07/2023 (1)), and this at an average age of access of about 54 years.

4 Why is occupational disability insurance important?

Most people depend on their monthly income. If this income is lost, it can quickly lead to existential problems. In fact, statistically speaking, one in four people will become unable to work at least once in their lifetime.

According to an analysis by Morgen & Morgen (as of 04/2023 (2)), the most common causes are:

• Nervous diseases - 34.5 %
• Diseases of the skeletal and musculoskeletal system - 20.05 %
• Cancer & other malignant tumors - 17.35 %
• Other diseases - 13.45
• Accidents - 7.6%
• Diseases of the heart and vascular system - 7%

Many people mistakenly think only of accidents as the cause and are way off the mark. Occupational disability insurance (DI) covers not only the income for the current year, but usually until the start of the pension.

Let's take the average salary in 2023 of 3,461.75€ gross/month, or 41,541€/year. In tax class 1, that's about €2,300 net/month (excluding church tax). So, for a 30-year old employee, the value of his labor until retirement equals 37 years x 12 months x 2300€ = 1.021.200€. Even possible salary increases are not taken into account here.

5 What does an occupational disability insurance cost?

The costs for a disability insurance are very individual and depend on various factors such as your age, the pension amount, the state of health at the beginning of the contract and of course your profession. To get an orientation, here are a few examples:

For all calculations, the following applies: BU with top rating, benefit in the event of incapacity for work, waiver of abstract referral, non-smoker, coverage until age 67.

• Student of economics, 25 years old, secured pension: 1.300€ = 39€/month
• Locksmith, 22 years old, secured pension: 1.600€ = 116€/month
• Student, high school, 17 years old, secured pension: 1.200€ = 47€/month
• Doctor, employed, 35 years old, secured pension: 2.500€ = 84€/month
• Controller, 30 years old, secured pension: 2.000€ = 82€/month
• Production worker, 28 years old, secured pension: 1.500€ = 204€/month

As you can easily see: for manual workers the BU is very expensive. In this case, basic disability insurance is often recommended as an alternative. Unfortunately, this coverage is not nearly as good as the occupational disability insurance, but it costs a lot less.

Please note: I have not listed civil servants here, as these are somewhat different concepts with disability.

6 What should I pay attention to when taking out a policy?

Sensible advice comes first. Choosing the right occupational disability insurance (DI) can have a significant long-term impact on your life. For all insurance policies to which this applies, you should seek professional advice. Compared to taking out insurance "on your own" on platforms such as Check24, etc., this does not cost any more. The premiums remain absolutely identical. Apart from that, the following points (among others) are important:

• Financially strong insurerCheck the ratings, e.g. at Franke & Bornberg, to assess the reliability of the provider.
• Appropriate BU amountAs a rule of thumb you can take 80% of your net income, but never less than 1,000€. Small pensions are nonsense, because the BU pensions are counted towards social benefits.
• Agree on appropriate dynamics3% is usually sufficient here, serves as inflation compensation.
• Good reinsurance options: Look for options to increase pensions, with or without cause.
• Waive abstract referral: Fortunately, this is usually standard these days. It only matters if you can still do your last job, not any other.

7. how does the application process work?

Applying for disability insurance starts with finding the best provider for your personal situation. This works very well with an independent broker who can compare many companies. The process is usually as follows:

• Compare available providers.: Find a broker who can help you find the best deal.
• Answering the health questions: In the application, you'll have to answer some health questions, some of them awkward.
• Check the electronic health record (ePA).: In my consultations, I advise requesting the ePA from the health insurance company. It lists all the services used over the last five years, including the doctors' diagnoses. The provision is free of charge and certainly provides surprises from time to time.
• Filling out the applicationIf there are no health problems that could lead to a refusal, the application is filled out normally. In case of uncertainty, an "anonymous risk pre-enquiry" should be made without personal data. This will prevent you from having to indicate a previous refusal with other companies.
• Result of the requestDepending on the information you provide, you will receive either a rejection, acceptance or acceptance with risk surcharge or exclusion. The criteria are different for each company. Exception: mental illness, here there are usually consistently rejections. Depending on the company, however, there are short or long query periods, which offer individual leeway.

The application is therefore somewhat more complex than for private liability and should be carried out with support. It is better to invest a few hours more at the beginning than to be annoyed later.

8) Does it make sense to combine occupational disability insurance with old-age provision?

A very clear NO. An occupational disability insurance is intended to cover the occupational disability, a retirement provision serves the retirement provision. If you couple these two contracts, you lose your flexibility. Changes to one of the two contracts are only possible to a very limited extent or not at all. For example, you can't cancel your old-age provision and keep the occupational disability insurance - not a nice thing.

In addition, you should consider the following: Just because a company offers good occupational disability insurance does not automatically mean that it is also convincing when it comes to retirement provision. So far, I haven't found the perfect solution. Often, a so-called BUZ (occupational disability supplementary insurance) is included in private pension insurance policies, of course with a premium waiver for retirement provision if you become occupationally disabled. This module also costs you money every month. It may even be cheaper for you to take out a higher occupational disability pension and use it to finance the contributions to the pension plan.

Simply put: It is advisable to keep occupational disability insurance and retirement provision separate in order to maintain flexibility and take advantage of potential financial benefits.

9. taxation of the occupational disability pension

That's right, there was something... In our country, you always have to pay taxes on everything, and that of course also applies to the occupational disability pension (BU pension). Fortunately, the occupational disability pension does not have to be taxed in full, but only with the share of earnings. What does that mean?

The profit share is calculated depending on how long the remaining term of your insurance is. These values are fixed and pretty easy to find via Google. I have taken the data that I use for the examples from there:

• Case 1: Residual term BU = 10 years - income share = 12%.
• Case 2: Residual term BU = 20 years - earnings share = 21%.
• Case 3: Residual term BU = 30 years - earnings share = 30%.

If you have no income other than the BU pension, the following calculation results for a BU pension of €2,000/month (tax year 2023, basic tax allowance: €10,908):

• Case 1: 2,000€ x 0.12 x 12 = 2,880€ = no income tax.
• Case 2: 2.000€ x 0,21 x 12 = 5.040€ = no income tax
• Case 3: 2.000€ x 0,3 x 12 = 7.200€ = no income tax

I have also left out deductible health insurance contributions. If you have no other income, your occupational disability pension would indeed be tax-free. For the dividend strategists: You still pay your capEst.

10. when should the BU be concluded?

Taking out occupational disability insurance (DI) makes the most sense when you are young. At this stage of life, most people do not yet have any health problems and can therefore choose the best provider for them without any restrictions.

In the case of schoolchildren, especially those who are considering an apprenticeship in a skilled trade, an early conclusion with "student" status is often far more favorable.

For students, the same is true: graduating while still a student is usually less expensive than later in one's career. Therefore, you should take the opportunity when you are young and healthy to get the best conditions and benefit from lower premiums in the long term.

11. conclusion

Occupational disability insurance is one of the most important insurances of all, and consumer protection sees it that way, too. If you can get the protection at an acceptable premium, you should definitely invest the money. The often quoted comparison with the fully comprehensive insurance for your own car is in my opinion very apt: Why should you insure your 30,000€ car for 800€ per year fully comprehensive, but not protect your own, disproportionately more valuable work force for a lower annual premium?

Of course, there are exceptions. People who cannot get BU or who would have to pay exorbitantly high premiums have to look for other solutions. Those who already have a high level of assets or other insurance that provides financial security in the event of occupational disability do not need BU. For everyone else, however, BU is (almost) always the best possible coverage option.

The special situation of civil servants would go beyond the scope of this article. If you have any questions, feel free to ask in the comments or on Instagram.

ATTENTION: This post does not replace any advice and is not complete. Some statements are my personal opinion/recommendation. It is only intended to illustrate and explain fundamentally the occupational disability insurance.

A tip at the endSome health insurances subsidize an occupational disability insurance with up to 500€ per year within their bonus program. This option is a very good financial relief especially for young people with low income, like pupils, trainees and students.

If something is worded awkwardly or incomprehensible, please let me know. Then I try next time to implement the points :)

Sources: Can't post as URL because the already modest formatting is then removed. To (1): Taken from the page of the German Pension Insurance. To (2): Taken from the statistics of Morgen & Morgen - both easy to find via Google.