It took a long time... But when a man says he's going to do it, he does it, you don't have to remind him every 6 months! Nevertheless, sorry for the long wait... The last few months have been very stressful and unfortunately I haven't had the time to devote to the post you requested. As the topic has come up here again recently, I've taken the time over the weekend. I hope this answers a few of your questions 🙃
Overview:
1 What is occupational disability insurance?
2 How does occupational disability insurance work?
3 Why a reduced earning capacity pension is not enough!
4 Why is occupational disability insurance important?
5 What does occupational disability insurance cost?
6 What should you look out for when taking out insurance?
7 How does the application process work?
8. does it make sense to combine occupational disability insurance with retirement provision?
9. taxation of the occupational disability pension
10 When should the BU 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 up to an age specified in the contract (usually until retirement).
2 How does occupational disability insurance work?
Disability insurance basically works very simply: you take out a policy and pay a monthly premium to the insurance company. If it then happens that you are no longer able to carry out your job for (probably) longer than six months at a rate of at least 50%, the company pays you the agreed monthly disability pension.
This insurance is a so-called "risk insurance". It is comparable to car insurance, for example: you receive a benefit if something goes wrong, i.e. in the event of a claim. However, if everything goes smoothly and you remain healthy until the end of the contract, no money is paid to you - just like with your car insurance if you drive accident-free.
3. why the reduced earning capacity pension is not enough!
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 already paid into the statutory pension insurance scheme for at least five years.
- In the last five years before the onset of reduced earning capacity, you must have paid your compulsory contributions to the German pension insurance scheme for at least three years (in total, not in one go).
- Your ability to work (the ability to do 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 cannot give you a general amount. It's best to take a look at your last pension statement (that onion-shaped paper that comes in the post once a year). Nevertheless, here are a few figures: According to information from Deutsche Rentenversicherung, the average reduced earning capacity pension for existing pensions is €933 per month (as at 01/07/2023 (1)), and this is based on an average starting age of around 54 years.
4 Why is occupational disability insurance important?
Most people are dependent on their monthly income. If this income is lost, this 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 at 04/2023 (2)), the most common causes are
- Nervous disorders - 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 of accidents as the only cause and are way off the mark. Occupational disability insurance not only covers the current year's income, but usually up to the start of retirement.
Let's take the average salary in 2023 of €3,461.75 gross/month, or €41,541/year. In tax class 1, this is around €2,300 net/month (excluding church tax). For a 30-year-old employee, the value of his or her work until retirement is therefore 37 years x 12 months x €2,300 = €1,021,200. Even possible salary increases are not taken into account here.
5 What does occupational disability insurance cost?
The cost of disability insurance is very individual and depends on various factors such as your age, the amount of the pension, your state of health at the start of the contract and, of course, your profession. To give you an idea, here are a few examples:
The following applies to all calculations: BU with top rating, benefit in the event of incapacity for work, waiver of abstract referral, non-smoker, cover until 67.
- Business student, 25 years old, insured pension: €1,300 = €39/month
- Fitter, 22 years old, insured 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 employee, 28 years old, secured pension: €1,500 = €204/month
As you can easily see, occupational disability insurance is very expensive for manual workers. Basic disability insurance is often recommended as an alternative. Unfortunately, this insurance is not nearly as good as 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 look out for when taking out a policy?
Sound advice comes first. Choosing the right occupational disability insurance can have a significant and long-term impact on your life. You should seek professional advice for all insurance policies to which this applies. Compared to taking out insurance "on your own" on platforms such as Check24 etc., this costs no 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, as disability pensions are offset against social benefits.
- Agree on appropriate dynamics3% is usually sufficient here to compensate for inflation.
- Good supplementary insurance optionsPay attention to options for pension increases, with or without cause
- Waiver of abstract referenceFortunately, this is usually standard nowadays. The only thing that counts is whether you can still do your last job, not just any other job.
7 How does the application process work?
Applying for occupational 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 the available providersFind a broker who can help you find the best offer.
- Answering the health questions: In the application you have to answer some, sometimes unpleasant, health questions.
- Check the electronic patient file (ePA): During my consultations, I advise you to apply for the ePA from your health insurance company. This lists all the services you have used in the last five years, including the doctors' diagnoses. It is provided free of charge and can occasionally lead to surprises.
- Completing the applicationIf there are no health problems that could lead to a rejection, the application is completed as normal. If you are unsure, you should make an "anonymous preliminary risk inquiry" without personal data. This prevents you from having to declare a previous rejection to other companies.
- Result of the inquiryDepending on your details, you will either receive a rejection, acceptance or acceptance with a risk surcharge or exclusion. The criteria vary from company to company. Exception: mental illnesses, here there are usually rejections across the board. Depending on the company, however, there are short or long query periods that offer individual leeway.
The application process is therefore somewhat more complex than for personal liability insurance and should be carried out with support. It is better to invest a few more hours at the beginning than to be annoyed later.
8. does it make sense to combine occupational disability insurance with retirement provision?
A very clear NO. Disability insurance is intended to cover occupational disability, while retirement provision is intended to provide for old age. If you link these two policies together, 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 disability insurance - not a good thing.
You should also bear the following in mind: just because a company offers a good occupational disability insurance does not automatically mean that it also offers a good pension plan. I have yet to find the perfect solution. A so-called BUZ (occupational disability supplementary insurance) is often included in private pension insurance policies, naturally with a premium waiver for old-age provision if you become unable to work. 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 your pension contributions.
Put simply, it is advisable to keep your occupational disability insurance and retirement provision separate in order to maintain flexibility and take advantage of potential financial benefits.
9. taxation of the disability pension
Right, there was something... In our country, you always have to pay tax on everything, and of course this also applies to the occupational disability pension (BU pension). Fortunately, the disability pension does not have to be taxed in full, but only with the income portion. What does that mean?
The income share is calculated depending on how long the remaining term of your insurance is. These values are fixed and fairly easy to find via Google. I took the data I used for the examples from there:
- Case 1: Remaining term BU = 10 years - income share = 12%
- Case 2: Remaining term BU = 20 years - income share = 21%
- Case 3: Remaining term BU = 30 years - income share = 30%
If you have no other income apart from the disability pension, the following calculation results for a disability 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 disregarded deductible health insurance contributions here. If you have no other income, your occupational pension would actually be tax-free. For the dividend strategists: You still pay your capital gains tax.
10 When should the BU be taken out?
It makes most sense to take out occupational disability insurance 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.
For students, especially those who are considering training in a trade, it is often far more favorable to take out insurance early on with "student" status.
The same applies to students: taking out a policy during your studies is usually cheaper than later in your professional life. You should therefore 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 types of insurance of all, and consumer protection sees it that way too. If you can get cover at an acceptable premium, you should definitely invest the money. In my opinion, the often-cited comparison with fully comprehensive insurance for your own car is very apt: why should you insure your €30,000 car for €800 per year with fully comprehensive cover, but not protect your own, disproportionately more valuable workforce for a lower annual premium?
Of course, there are exceptions. People who cannot get an occupational disability insurance or who would have to pay exorbitantly high premiums must look for other solutions. Anyone who already has a high level of assets or other insurance that provides financial security in the event of occupational disability does not need an occupational disability insurance. For everyone else, however, the BU is (almost) always the best possible insurance option.
The special situation of civil servants is beyond the scope of this article. If you have any questions, feel free to get in touch in the comments or on Instagram.
ATTENTIONThis article is not a substitute for advice and is not exhaustive. Some statements are my personal opinion/recommendation. It is merely intended to illustrate and provide a basic explanation of occupational disability insurance.
A tip at the endSome health insurance companies subsidize occupational disability insurance with up to €500 per year as part of their bonus program. This option is a very good financial relief, especially for young people with a low income, such as school pupils, trainees and students.
Please let me know if something is worded unfavorably or is incomprehensible. Then I'll try to implement the points next time :)
Sources: I can't post this as a URL because the already poor formatting will be removed. Re (1): Taken from the German Pension Insurance website. Re (2): Taken from the Morgen & Morgen statistics - both easy to find via Google.
