The residual disability benefit is one of the most important features to evaluate when purchasing an individual disability insurance policy because it enhances the policy to include benefits for PARTIAL disability and not just TOTAL disability. Since 90% of new disability claims are caused by illness, and most illnesses do not totally disable a person over-night, it is logical to assume that many claims will start or end (if not both), as a partial disability. For this reason, it is critical that consideration is given to residual disability benefits.
Qualifying for Residual Benefits
It is important to recognize that every disability insurance policy is unique and should be carefully reviewed at the time of purchase. In general, there are two ways that a partial disability claim can be triggered:
Loss of Time or Duties: Solely due to injury or illness, you are able to perform the primary duties of your occupation but are prevented from performing them the normal amount of time required OR you are able to work full-time but prevented from performing one or more of the primary duties of your occupation.
Loss of Income: While gainfully employed and not totally disabled, solely due to injury or illness, you experience a loss of income that is at least 15-20% of your prior income. The required percentage loss of income varies by policy and should be carefully reviewed.
Consumers should be aware that each insurance company will use their own wording and eligibility requirements for these benefits. Logically, it is easier to qualify for residual benefits with only one requirement instead of multiple requirements.
Residual Disability Benefit Calculation
Understanding how a residual disability benefit is paid is just as important as understanding how to qualify for benefits. Every disability insurance policy is unique, but we’ve composed a description of the most common benefit calculation methods.
Proportionate Benefit: The most common calculation of residual benefits is the proportionate benefit which is based on the loss of income. For example, a 40% loss of income will warrant a residual disability benefit equal to 40% of the policy’s total monthly benefit. Many insurance companies will additionally include a guaranteed minimum benefit, such as 50%, during the first 6-12 months of a claim.
Total Loss of Income Benefit: The proportionate benefit calculation is the primary calculation used with every policy that we offer, but some companies will vary in how they pay benefits during the first 12 months. One of the most attractive payment structures offered today will actually pay benefits equal to the loss of income, not to exceed the total monthly benefit, during the first 12 months of benefits being paid.
John is an independent contractor earning $100,000 annually. After experiencing a debilitating injury/illness, he is forced to work 30% less hours and experiences a 30% loss of income as a result. The graph below illustrates how benefits are paid under each of the two benefit structures, for the first 12 months of a claim.
The recovery benefit is payable when a person returns to full-time gainful employment following a period of disability for which benefits were paid, but still has a 15-20% loss of income due to the injury or illness that caused the original disability.
This benefit is particularly important for physicians, dentists, attorneys and other fee-for-service professionals, but can really affect anyone. Consider the effect of a solo medical or dental practice closing for an extended period of time. Even after reopening on a full-time basis, the profitability is likely to be reduced substantially. The loss of income experienced after an extended disability can continue for months, years and possibly be indefinite. For this reason, the benefit period available for recovery benefits requires careful consideration.
Our Firm Can Help
Call 800-817-4522 or submit a quote request today. Our firm represents the leading disability insurance providers and can assist you in evaluating your options and ultimately applying for the policy that best suits your needs.