Medical conditions that prevent you from performing one or more essential duties of your job or from performing them as frequently may qualify you for a residual benefit. The task you carry out might be restricted in some ways and not in others, depending on your condition.
Your obligations may also be delegated to you part-time but not full-time. Therefore, a residual benefit comes into play, considering it allows the policyholder to get some disability benefit before they back to work. Here’s everything you need to know about residual benefit.
What is a Residual Disability Benefit?
In disability insurance, the policyholder receives a residual benefit that is part of the total benefits. Percentages are typically used when calculating residual benefits.
In general, residual disability benefits are calculated as a percentage of your monthly income during a limited period (typically six months). To calculate the percentage of income payment, we must divide the lost income by the percentage of income lost. Your benefit, for instance, would be 40% of your monthly indemnity if your income were reduced by 40%.
You may be able to add a residual disability benefit to your policy as an optional rider or as part of the core coverages as part of the insurance policy you select. Ensure you discuss the importance of this essential benefit with your agent to gain a deeper understanding of how it can help you mitigate disability risk.
Total vs. Residual Benefit
An individual who is disabled cannot work for a significant amount of time, whether temporarily or permanently. “Total disability” can, however, be defined differently by insurance policies.
The following is a presumptive total disability benefit:
Certain conditions are assumed to be disabling by most insurance companies. Typical examples of these conditions are:
- Both eyes are blind
- Both ears are deaf
- Speech impairment
- Both hands are unable to function
- Two feet are no longer usable
- Hands and feet are used only once
To be considered disabled, you don’t have to meet the usual requirements if you’re affected by one of these conditions. As an added benefit, you can begin receiving benefits right away and continue to receive them even if you return to work in the future.
Own Occupation Coverage
Total disability is generally defined concerning a policyholder’s “own occupation” as the inability to perform their substantial and material duties. It is possible to receive disability benefits even if you work in another occupation and are helpless. In addition to being more expensive, own occupation policies are often unavailable to individuals with medical histories or who work in riskier occupations.
Any Occupation Coverage
As defined by other policies, “total disability” means being unable to perform any job duties. In contrast, own occupation policies have a narrower definition. According to this definition, you must not only be unable to perform the functions of your occupation, but you must be unable to perform any occupation. “Disability” is typically defined as your inability, based on your education, work experience, and other factors, to engage in any gainful occupation.
Many policies use an “own occupation” and an “any occupation” definition of disability. Own occupation coverage may only be available for a limited time, such as two years. Upon expiration of this period, you must meet the narrower “any occupation” definition of disability. The same is often true of long-term disability policies.
Residual and Partial Disability
In general, residual disability refers to being unable to perform one or more of your occupation’s duties. In addition, it involves the loss of a significant percentage of your pre-disability income, along with the inability to do these tasks as often as before. The three types of coverage differ in how benefits are calculated for partial disability and residual disability.
Residual Disability Coverage
The amount of disability benefits you receive depends on how much income you lose. Even if you do not have a total disability, these policies pay benefits. Working part-time and earning the same income as working full-time determines the benefits you’ll receive. In most cases, residual disability benefits require at least a 20 percent loss from pre-disability income.
When an individual receives residual disability benefits rather than total disability benefits, their monthly income can exceed a certain percentage of pre-disability income, and their benefits are reduced or eliminated. Some policies require a period of total disability to qualify for residual disability benefits.
As a rider to your total disability policy, you can add residual coverage. This is known as an income replacement policy. Total disability policies are typically more expensive than income replacement policies.
Partial Disability Coverage
Partially disabled people can take out disability insurance. When you can perform some of your occupation’s duties, both types of coverage pay benefits. However, partial disability does not consider income loss. Rather than getting a full disability benefit, you get 50 percent (or sometimes even less) of it. There is a much shorter benefit period, usually between six and twelve months.
How Residual Disability Benefits Work
An income loss caused by a disability triggers the residual disability benefit in a disability income policy. It depends on the insurance company whether the minimum income loss is 15% or 20%.
As a result of illness or injury, residual disability benefits are determined by the insured’s percentage of lost income. For example, the company would pay 25% of the total disability benefit if an insured suffered a 25% loss of income due to disability.
You must add the residual disability benefit as a rider unless your policy includes it in its core coverages. Unless an insured is considered disabled, they cannot collect benefits.
Every applicant must ensure their disability income policy includes this coverage because most disability claims are caused by illness rather than injury.
When Can You Claim Residual Disability Benefits?
In the case of a non-totally disabled disability policyholder who can continue to work, residual disability benefits are available. Once the elimination period has expired, the insured usually receives the total benefit amount during the first six months.
If the insured had been disabled, the benefits received during the initial period would have been the same. Most policies allow the insured to extend partial disability coverage after the initial coverage period ends if they remain disabled.
Benefits may be collected during the extended coverage period (typically at 65), but they are reduced based on the insured’s income.
The policyholder must meet one of the following three conditions to qualify for residual disability benefits:
Loss of Income
When a policyholder suffers an illness or injury that results in an income loss of 15% to 20%, they are entitled to benefit coverage;
Loss of Time
Having lost time may mean a policyholder can perform all of their assigned duties but cannot work full-time;
Loss of Duties
If a policyholder cannot perform all of their usual duties due to loss of duties, they may still be able to work.
Policyholders who have their income reduced by 75% or more are generally deemed disabled by insurance companies, and the total benefit amount is payable.
How to Calculate Residual Disability Benefits
Insurance companies calculate disability benefits based on loss of income and disability benefit amount. An insured with disability insurance who earns $5,000 a month but whose income is covered by 60% of disability insurance is as follows:
If a total disability claim is filed after the elimination period, 60% of the insured’s monthly income ($3,000) will be paid.
Nevertheless, if the insured works part-time after becoming disabled and their monthly income is reduced to $2,000, then the reduced income would amount to a 60% income reduction. Unless the company considers the case to be a total disability, in which case the full benefit would be paid, the insurance company will pay 60% or $1800 per month.
Your agent should explain any caps and limits on your residual disability benefits coverage since residual disability benefits vary from company to company.
Conclusion
There are two types of disability – total and residual – depending on the policy you have. When this occurs, you should be cautious of insurers who claim residual benefit when you may be disabled. Insurance contract language that is ambiguous is usually interpreted in the insured’s favor in most states.
Residual Benefit FAQs
Is partial disability the same as residual disability?
Income protection is provided at a lower cost by stand-alone residual disability coverage. Part-time disability coverage offers the cheapest cost and shortest length of coverage. Waiting periods are generally longer on cheaper policies.
What is the residual disability benefit period?
Depending on your insurance policy, residual disability benefits may last for a certain period. The maximum benefit period maybe two or five years in some policies, while others may provide benefits until you can return to pre-disability income.
