financial security in the event of occupational disability

Income protection insurance in Germany

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First things first

Income protection insurance is an important protection for all those who live off their earned income. In the event of an occupational disability, a monthly pension is paid.

The insurance should be taken out at a young age. The insurance premium depends on the age and the current state of health.

The contents and sum insured of the occupational disability insurance should be regularly adjusted to your current life situation and income situation.

There are many pitfalls to consider when applying for this insurance. Advice from an independent expert is advisable to ensure that no mistakes are made and that the insurance pays when it is needed.

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Income protection insurance in Germany

Patrick Ott
Patrick Oliver Ott
Expert for insurance and finance
8. March 2022
incapacity to work due to illness or accident

Why do I need income protection insurance?

The ability to earn income is most likely your biggest asset unless you already are filthily rich or are inheriting millions. You don’t believe this? Why, just multiply your current gross income by the years until retirement.

Example: Take a 35 year-old with a monthly regular income of €3,500 and plans to retire at age 65. Potential earnings between now and then is €1,260,000. This is the value at stake if at 35 years of age he or she loses the ability to generate such income because sudden incapacity to work due to illness or injury. And this calculation obviously has not counted in increase in salary over time, promotion etc.

And now just imagine other assets with a comparable value: a house, luxury car, jewelry; you would of course and without thinking twice about it, insure these items against destruction or loss, right? So why not the asset of “earning income”? Due to these reasons the income protection insurance is seen as the most important insurance for everybody who depends on his or her income.

Real risk: 1 in 5 people need their income protection insurance

The danger of occupational disability lurks not only at work. Accidents and injuries in the private sphere during household chores and leisure activities can also end your professional career. Family problems and strokes of fate also frequently lead to illnesses of the psyche and ultimately to occupational disability. Many other diseases also do not select their victims on the basis of their occupations.

In jobs with physical stress, diseases of the skeletal and musculoskeletal system predominate as a cause - in mentally demanding and stressful jobs, mental illnesses are more common.

According to the German Pension Insurance Fund, one in five people does not manage to work in full until retirement age, but instead receives a reduced earning capacity pension for a period of time in the work life, and more often than one likes to contemplate: forever, even.

There is a statutory coverage for this. However, this state protection is very scarce. Additional protection against the loss of one's own working capacity is therefore important for almost every working person. That is why occupational disability insurance makes sense for all occupational groups. Those with a lower risk also pay lower premiums.
CR&Cie Real risk: 1 in 5 people need their income protection insurance

What is income protection insurance and how does it work?

Quite simply, it's probably the most important insurance of them all. After all, if you can no longer perform your job for health reasons, you no longer have an income and face financial ruin. Because your fixed costs remain mostly unchanged.

And the tragedy is that, statistically speaking, one in five working people becomes unable to work at least for some serious period of time until they’ll reach retirement. The reasons for this are increasingly to be found in psychological areas, such as burnout.

There are different methods of income protection. Some pay out a per-diem as long as you stay ill, others pay a monthly pension. Others pay a lump sum if you contract any of a large number of clearly defined critical illnesses (cancer, stroke, heart attack, etc). Other insurances cover the loss of important faculties such as hearing, seeing or walking, and still others for accident-related loss of limbs or faculties. The different possible insurances are:
  • Basic capacities insurance
  • Disablity pension insurance
  • Occupational disablity insurance
  • Dread disease insurance

Basic Capacities Insurance

What do they provide?

Cheap cover in the case of loss of basic human capacities

When does it come into effects?

For example in the case of loss of hearing, sight, use of hands

Payment

Pension or lump sum payment

Duration of the payment (the longer, the more expensive the insurance)

As long as the damage persists, up until the end of contract as chosen by you

But...

Protection only in the case of serious handicap

Disability Pension Insurance

What do they provide?

Cover in the case of restriction in the pursuit of a specific professional activity

When does it come into effects?

Motor system disorders or psychological disorders

Payment

Pension

Duration of the payment (the longer, the more expensive the insurance)

As long as illness prevents gainful employmentt of up to three hours per day, up until the end of contract as chosen by you

But...

All activity must be taken on, regardless of education and professional experience

Occupation Disability Insurance

What do they provide?

Cover in the case of restriction in the pursuit of a specific professional activity

When does it come into effects?

Motor system disorders or psychological disorders

Payment

Pension

Duration of the payment (the longer, the more expensive the insurance)

As long as illness causes a 50 percent occupation disability, up until the end of contract as chosen by you

But...

Expensive. The risk of not being unable to work despite illness or (rarely) being referred to other fields of employment

Dread Disease Insurance

What do they provide?

Cover of the financial consequences in the case of certain serious illnesses

When does it come into effects?

For example in the case of cancer, heart attack, stroke

Payment

Lump sum payment

Duration of the payment (the longer, the more expensive the insurance)

Lump sum payment

But...

Not protection in the case of degenerative illness (bones, nerves)

Occupational disability insurance

The occupational disability insurance is the most important and comprehensive form of income protection in Germany. It takes over if your sickness cover (statutory sick pay or a private per-diem coverage from your private health insurance) run out. Which is the case when it is determined that you are not just ill anymore but occupational disabled.

With this kind of coverage, you insure your last profession. The illness that prevents you from doing your job is irrelevant. Most insurers will pay if you are at least 50 percent incapacitated - as proven by a doctor with an estimated time period of staying incapacitated for more than 6 months.

You receive as much monthly disability pension as agreed in the policy. How much you have earned before has no influence. Many people forgo the acquisition of disability pension insurance or occupational disability insurance due to the cost. The general risk for everyone, though, is still staggering: Almost one in every five employees will become either entirely or partially incapable of working due to health problems.

However: anyone who is younger than 45 years old only receives a pittance from the state pension fund. Of course, freelancers and the self-employed get nothing at all, unless they decided to pay into the German welfare system, which very rarely happens.

How high should the occupational disability pension be?

The pension must cover your living expenses if you have no income and possibly no savings. So calculate how much money you need to live on each month.

Common fixed expenses are: rent, food, clothing, medications, other insurance, retirement savings, car, any payments to children and ex-partner.

Rule of thumb: Insure 80 percent of your household's net income.

If in doubt, you should be able to get by with that. Of course, the higher your monthly free capital to save or invest is in contrast to the simple necessities of life, the lower your percentage of income protection needs to be.

The amount of the premiums depends on:
  • insured monthly pension,
  • years forward until retirement,
  • state of health at the time of conclusion and
  • profession
The price differences between the individual occupational groups are drastic: A 35-year-old craftsman who works in construction pays between € 200 and 400 in premiums per month for an insured pension of € 1,500. Which means it is nearly unaffordable for him. A manager on the other hand, who mainly sits at a desk, pays only € 60 to 150 for the same benefits.

Affordable occupational disability insurance is therefore much easier to find in professions with a comparatively low risk of accident or illness. And it is less expensive when looking at the monthly premiums the earlier you start it.

In addition to stand-alone occupation inability insurance or the corresponding supplementary insurance coupled to endowment or term life insurance, there are further options for protecting one’s own ability to work: basic capacity insurance, disability pension insurance and serious illness cover, also called dread disease insurance.
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Alternatives to occupational disability insurance

There are a number of other forms of insurance that pay, for example, in the event of loss of basic abilities - “Grundfähigkeiten”, for instance speaking, hearing, walking. Usually this kind of insurance also pays out a monthly pension in such a case, some insurance also offer lump-sum payments.

Dread Disease Insurance

One alternative on the market is the criticals illness insurance (also known as dread disease coverage). It - similar to a a life insurance - pays out a one-time amount at the diagnosis of a really serious illness, regardless of whether you can continue to work or not.

The pay-out is usually a lump sum and not a monthly pension (though this can be combined with some insurance companies). In contrast to an occupational disability pension this means the money can run out eventually if you continue to be unable to work for long term.

On the other hand you’ll have a large amount of money available instantly and without regards to your ability to fully work or not. For certain professions and situations, such insurance can be a good supplement to an occupational disability insurance or even an alternative as the best financial protection.

Total disability insurance / Incapacity insurance

This insurance pays a pension if you can only work less than three hours a day in any profession. The amount of the disability pension is agreed in the contract. The one most similar to occupational disability insurance is total disability pension insurance (German: Erwerbsunfähigkeitsversicherung). This is an emergency solution for those who cannot get an occupational disability insurance or cannot afford the premiums.

A pension is paid, if long-term physical or mental restrictions prevent the insured party from working up to three hours per day. In the case of occupational disability insurance on the other hand, the agreed pension should come into effect if the insured party can no longer work at his previous occupation to 50 percent. Total disability pension insurance only protects the ability to pursue any occupation. It is therefore less costly, as the risk for the insurance company is considerably smaller.

A 30-year-old architect who is still able to work four hours per day as a museum attendant is, therefore, not unfit for work. Total disability pension cover would cost him only € 30-50 per month from a number of insurance companies in Germany and would provide a pension of € 1,000 Euro.

Occupational disability insurance will of course cost more (examples see above or ask us for an estimate here). The amount of the rate depends primarily on the amount of the monthly pension, the age and occupation of the insured party as well as the term of the contract.

Total disability pension cover is, above all, low-cost basic provision. In addition to this, it is suitable for persons with risky occupations, who have to pay considerably higher premiums for classic occupational disability insurance or cannot get any occupational disability cover at all.

Basic capacities insurance

This type of insurance offers an even more rudimentary form of cover. This first comes into effect if elementary human capacities are lost, such as sight, speech and the use of one’s hands as well as the ability to drive or climb stairs. Contrary to expectation, it is not accidents but rather illness that usually leads to the loss of certain physical capacities.

What is special about this product? The basic capacity pension is not coupled to the question of whether the insured party can work. If, for example, a person who has gone blind finds a new job as a masseur or telephonist, the pension or the capital continues to be paid out.

That would be unthinkable in the case of most occupational disability insurance and disability pension insurance. With a good basic capacity insurance, a 35-year-old receives a monthly pension of € 1,000 for monthly premiums of around € 30.

Choosing the right income protection

What insurance is offered to whom depends primarily on their occupation. Academics become unfit for work less often than those with physically demanding occupations. Unlike a roofer, a lawyer or a teacher can continue to work in a wheelchair despite motor system disorders.

In this case, an academic is not unfit for work and the insurance company for an occupational disability insurance may not pay out after all. It is extremely annoying if you have chosen to protect yourself and then have to fight with the insurance company about whether or not you are sufficiently ill.

Insurance policies against serious illnesses (aka Dread disease insurance or Critical Illness insurance) are just a pragmatic solution in such cases. Similar to basic capacity insurance, they pay out if one is affected by one of approximately 40+ clearly defined serious illnesses – regardless of whether the insured party can continue to work or not. Which includes the “big three” in our times: heart attack, stroke, and cancer.

The decision between occupational disability or dread disease is essentially a philosophical question: Would I prefer a pension for the duration (possibly temporally limited occupation disabilities) or will I gain more freedom at the moment when I become ill with a lump sum payment.

Not all serious illnesses covered by dread disease insurance necessarily end in death. The most frequently occurring illnesses, such as heart attack, stroke and cancer with one million new cases in Germany each year, have ever-improving chances of recovery.

However, someone who cannot go back to working 80-hour weeks at a law firm without putting their health at risk again after surviving a heart attack or a heart muscle inflammation is simply unemployed – and not unfit for work. An occupational disability insurance would not be obligated to pay out in such a case.

What do I get paid if I am ill or disabled?

Employers in Germany are legally obliged to pay your income for a period of 43 days in the event of your inability to work. Publicly insured employees receive another 78 weeks of Krankengeld, a per diem that is capped at a relatively low level.

This in total maybe insufficient compared to your original salary if you are a high earner. If you are privately insured you can add a private per diem health insurance to your health insurance, which pays a per-diem in case of long-term illness.

Difference between ill and occupational disabled!

However, many people, even Germans, do not know that this kind of insurance stops to pay out as soon as you are considered to be rather occupational disabled than just “ill”. And it is the insurance that makes this definition.

Self-employed workers do not enjoy any public support (except if they pay extra for the statutory sick pay “Krankengeld”, but this is rare and not always possible). They have to depend on setting up a private per diem health insurance with the same critical situation as described above.

Disability pension from the state

If you become entirely disabled and cannot work in any capacity for at least 3 hours a day, you will get a disability pension (Erwerbsunfähigkeitsrente) from the government, which pays out only in small monthly amounts. Nothing you really want to rely on in order to sustain your current life style and financial situation.

Government support is insufficient for most people and will only become available should you be unable to carry out ANY form of work, not just your current occupation. Anyone who is chronically ill and can, therefore, no longer work faces in Germany the threat of social decline. Only considerable savings or insurance can provide relief.

It is not for no reason that consumer protection groups and insurance experts have been recommending the acquisition of private occupational disability insurance in Germany for years, in a rare instance of agreement between the two.

What insurance do I need for my individual situation?

Monthly pension or Lump Sum Payment? Anyone who depends on their hands or their intellectual work should not take the high risk of loss of income due to lengthy illnesses lightly. Yet with the growing range of products on offer, in addition to cost considerations the insured party must also weigh-up which health risks they are more likely to suffer from: Depression, stroke or the inability to use one’s hands?

Is a monthly pension for as long as I stay disabled my best form of coverage or should I rather aim for a lump-sum payout? Or a combination of both?

Obviously there can’t be a “one-size-fits-all” solution here. One clearly needs a modicum of good fortune to have chosen the correct insurance in the case of misfortune. Therefore, it is imperative to use professional advice for this process, ideally and independent advisor like an insurance broker.

This is all the more true because for this crucial insurance the terms&conditions are of the utmost importance. What level of cover you receive is what really matters and that the selected insurance company has a solid track record with regards to how it settles claims.

But also, the financial stability of the insurance company for the foreseeable future because this is usually a long-term contract. When you seek financial protection in any way or form through an insurance contract, the cheapest insurance offered to you may in the end just be the worst solution you could take.

How to set up an income protection insurance properly

In the application for an income protection insurance, each applicant must answer extensive questions about:
  • Previous illnesses suffered within the last 5 or 10 years, especially pre existing conditions.
  • The current occupation, in case of an occupational disability insurance.
  • Existing leisure time risks, for instance mountain climbing, flying, combat sports, motor or water sports.
Anyone who answers these questions incorrectly or incompletely is in breach of their pre-contractual duty of disclosure and may then not receive any benefits in the event of occupational disability - despite years of premium payments.

Therefore – and because for Expats the German language questions may sometimes be hard to fully understand – having an independent advisor on your side who is even liable legally if the application is not worked out properly due to his own fault, is very important in order to assess your medical history properly and fill in the blanks correctly in the insurance application form. With the risks and sums involved, you really don’t want to go for DIY here.

If the answers to these questions indicate an increased risk of occupational disability, the policy may be expensive or incomplete. This is because coverage is then often only possible with risk surcharges or benefit exclusions. In extreme cases, it may even be impossible to take out the insurance.

This is why it makes sense to take out occupational disability insurance at an early stage - i.e. before such increased risks become apparent to the insurer. If the risk increases during the term of the contract due to a different occupation or a new, high-risk hobby, this does not have to be subsequently reported in the case of modern contracts/policies.

Important: the difference between Net- and Gross-Premiums in insurance contracts

Although you only ever pay the net premium (often refered to as “Zahlbeitrag”), you should not lose sight of the gross premium (sometimes also called the maximum payment premium or “Bruttobeitrag”).

This is the amount you would have to pay if the insurance company did or could not let you participate in the company's surpluses. Insurers can increase the price up to the gross price without any circumstances.

Therefore, don't just look at a current premium. Also compare how much insurers can raise the premium. For some providers, the spread between gross and net premium is Zero, while others reserve the right to double the premium.

An insurance plan with a low net-premium can become a nightmare of increases if the bonus-calculation of the insurance company turns out to be simply too optimistic or simply completely nuts. You are usually better off with an insurance with no spread between net- and gross premiums at all or just small differences between them in order to have a reliable number to plan your budget for years to come.

Important for the self-employed or civil servants or students/pupils

Important for the self-employed

In principle, all occupational disability insurers can check with self-employed persons whether a reasonable reorganization of work processes can reduce the degree of occupational disability and thus avoid or prevent occupational disability.

But to what extent is a reorganization reasonable? In the past, there were often different opinions on this between the insurance company and the insured. In the meantime, more and more insurers - especially for companies with fewer than 5 employees - are waiving such reorganization.

Therefore, it makes sense to pay attention to the wording of this reorganization clause before signing the contract.

Quite often, for self-employed a critical illness insurance can make more sense. Because in case of a heart-attack, stroke or cancer you will not necessarily become occupational disabled right away or would not want to give up your business. But you might need to hire some external experts or other assistants in order to keep your business running and rescue what you have build up for now and for the future.

In such a case a lump sum that is been paid out at the moment a doctor diagnoses you with one of up to 40+ clearly defined severe ailments and medical conditions, you have the monies available to pay for this and also to pay for the best doctors and hospitals available.

Important for civil servants

Civil servants with more than five years of service are retired in the event of incapacity and receive a pension from their employer that increases with the length of service. This means that these civil servants are significantly better off than other employees.

This does not apply to probationary civil servants and civil servants on revocation. For them, private occupational disability insurance - possibly with a service disability clause - makes perfect sense.

A genuine disability clause does not necessarily improve insurance coverage, but it can make it easier to prove occupational disability. In this case, the certificate of retirement and the medical certificate should be sufficient.
CR&Cie Important for civil servants

Is occupational disability insurance also worthwhile for pupils, trainees and students?

Yes! This answer may seem surprising at first, because these people do not yet have a real profession. In addition, the risk of occupational disability at a young age is comparatively low - but not impossible.

The main reason for the unequivocal "yes" is that young people also suffer health problems due to illness, stress or accidents.

Thanks to their constitution and the medical options available to them, they are therefore rarely unable to attend school, college or work. But with pre-existing conditions, it can be difficult or even impossible to conclude a sensible and affordable occupational disability insurance policy later on. It is advisable to conclude the contract while still young and healthy.

To sum up

What is the best income protection insurance in Germany?

As has been shown above, options differ significantly in terms of service, contract conditions and contribution amounts.

Each of the different kind of insurance plans has special pros and cons which need to be assessed and then compared in their cost-benefit-ration for you and your individual personal situation in order to make an educated decision.

What remains true always is, that every person who lives from the income from their work should protect this. This is especially true if one is the sole or main provider of income in a family. Or if you set up a mortgage where your full income is important in order to sustain the family property.

Knowledge of these different options is essential, right down to the fine-print. We have that knowledge, and can use it to find the best plan for you and your family.

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