DISABILITY INSURANCE FAQs
The residual disability benefit is defined as the payout of partial disability benefits when an insured is partially disabled. The benefit is paid out on a temporary basis and is used to help the insured get back to work even if one or more job responsibilities cannot be completed.
What happens if an insured person is only ‘partially’ disabled? Partial Disability can come in several forms – perhaps he or she can perform some but not all of the major duties of the job, or can work only part-time. Under the definition of total disability, no benefits would be paid.
To solve the partial disability problem, the residual disability concept has been developed. Under a residual disability provision (either in the policy or available by rider), an insured receives a percentage of his or her disability benefit based on the percentage of income loss the sickness or injury has caused.
A total disability benefit is paid when the insured cannot perform some of his/her duties or can only work limiited hours which result in the loss of income. This benefit can be claimed until the insured recovers from the disability and returns to work or when the benefit period is exhausted.
Partial disability is defined as being able to complete partial work functions thereby losing only a portion of your normal income. Being partially disabled generally allows the insured to receive a percentage of his/her monthly indemnity until the insured has fully recovered or until the benefit period has expired.
When an insured’s partial disability benefits are exhausted, with some policies, he or she could be eligible to collect residual benefits under the extended partial disability arrangement. Although this benefit is the same as the partial disability benefit, it can last for as long as the insured needs it. The benefit, however, is reduced proportionally to the lost income.
Presumptive total disability assumes the insured will not recover from the disability and return to work. The disability is typically caused by blindness, deafness, or loss of limbs. There is no elimination period for presumptive total disability.
What is a Residual Disability Benefit?
Residual Disability Benefits are paid to the policyholder when the disability is considered a “partial disability” meaning that the disabled person can perform some of his/her duties or can only work part-time but is entitled to receive benefits under the partial disability definition in the policy. These benefits are referred to as residual disability benefits.
A residual disability benefit is generally equal to a full disability benefit but on a limited basis (typically six months), and then reduced to a percentage of your monthly income. The percentage of income payment is calculated based on the percentage of lost income. For example, if your income is reduced by 40%, your benefit will be 40% of your monthly indemnity.
Depending on the insurance company you select, the residual disability benefit may be part of the core coverages in your policy, or it can be added via an optional rider with an additional premium. Make sure you discuss this essential benefit with your agent to better understand its importance in your disability risk mitigation strategies.
How Residual Disability Benefits Work
The residual disability benefit in a disability income policy is triggered when the policyholder has a covered income loss due to a disability. With most disability policies, the minimum income loss can range from 15% to 20% and varies according to each insurance company.
Typically, the residual disability benefit an insured receives is based on his or her percentage of lost income that has resulted from the illness or injury. For example, if an insured suffers a 25% loss of income due to disability, the company would pay 25% of the total disability benefit up to the maximum benefit period stated in the policy.
It’s important to note that unless your policy contains the residual disability benefit in its core coverages, the benefit will need to be added as a rider. Without this critical benefit, an insured cannot collect any benefits unless he or she is considered totally disabled.
Since the majority of disability claims are a result of illness rather than injury, and that many illnesses can gradually cause disability, it’s important that every applicant make certain that this coverage is a part of their disability income policy.
When Can You Claim Residual Disability Benefits?
A disability insurance policyholder can claim residual disability benefits when not totally disabled but can continue to work with reduced responsibilities or time and reduced income. Once the elimination period (waiting period) is exhausted, the insured will collect the full benefit amount during the initial period which generally lasts about six months.
During this initial period, the benefits received will be the same as if the insured was totally disabled. When the initial period ends, most policies will allow the insured to extend the partial disability coverage if the insured is still disabled.
This extended coverage provision allows the insured to collect benefits until the policy expires (typically at age 65) but the benefit will be reduced according to a percentage of monthly earnings.
A policyholder can qualify for the residual disability benefits in three ways:
- Loss of Income – This is when the policyholder experiences a loss of at least 15% to 20% of their income as a result of an illness or injury and;
- Loss of Time – Loss of time is a trigger when a policyholder can perform all of their assigned duties but cannot work full-time or;
- Loss of Duties – Loss of duties happens when a policyholder can work but cannot complete all of their usual duties.
Historically, most insurance companies will consider a policyholder totally disabled once the loss reaches 75% or more of their income and will pay the full benefit amount stated in the policy.
How to Calculate Residual Disability Benefits
Insurance companies will calculate residual disability benefits based on loss of income and the amount of the disability benefit. For example, if an insured earns $5,000 per month has disability insurance covering 60% of that income:
- The insured would receive 60% of his or her monthly income ($3,000) for total disability after the elimination period is exhausted.
- If, however, after becoming disabled, the insured was able to work part-time and his or her income was reduced to $2,000 per month, the reduced income would represent an 60% income reduction. The insurance company would then pay 60% of the full benefit which amounts to $1800 per month, unless the company considers the case to be a total disability and would then pay the full benefit.
Since residual disability benefits amounts vary by company, it’s important that your agent discusses any caps and limits on your residual benefits coverage.
Basic vs. Enhanced Residual Disability Benefit Riders
Typically, a disability insurance applicant will have a choice of two residual disability riders to choose from. The choice is between a basic residual disability rider and an enhanced residual disability rider. The terms of coverage between the two riders can include the following:
In most cases, the enhanced residual disability rider will pay a higher benefit amount than the basic rider.
In most cases, an insurance carrier will trigger the enhanced residual disability rider when the insured suffers a loss of at least 20% of the insured’s earnings or 20% of the insured’s ability to complete their assignments or 20% of the time they are able to work. However, the basic rider is only triggered when the insured loses 20% of income, plus 20% of time worked or assignments completed.
With the enhanced residual disability benefit rider, the insured can collect a minimum of 50% of their monthly benefit for 12 months but the basic residual disability rider allows the benefit to be payable for only 6 months.
Another difference between basic and enhanced residual disability benefits is whether the insured allows the insured to work in their previous occupation or in another occupation to collect benefits. With the enhanced version, the insured can work in either occupation, but in the basic version, the insured must be able to work in their previous occupation to collect benefits while recovering.
Recovery benefits are an additional benefit commonly included in the residual benefits rider. These benefits are paid to help you financially when you have recovered from a disability and returned to work but are still experiencing a reduced income.
The recovery benefits are available to fill the income gap that commonly exists on a temporary basis when returning to work full time after a disability. They are especially helpful for small business owners who will need some time to rebuild their income to a pre-disability level.
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