Posted on: August 8, 2017 by Chuck Krugh, CFP
Not all disabilities completely knock people out of the work force. In fact, many disabled individuals are able to eventually return to work, or continue to work in a limited setting. But their disabilities still result in a substantial hit to their earnings, compared to what they were earning before their disability onset. A residual disability benefit may provide valuable protection in the common event of a partial disability – something not all disability insurance policies address.
What is a residual disability benefit?
A residual disability benefit rider or feature on a disability insurance policy provides supplemental coverage to an individual who has a disability and has suffered a significant reduction in earnings, but who is still able to work.
When might such a benefit come in handy? Many times, a residual disability benefit rider can be a tremendous help where the insured is undergoing a lengthy rehabilitation process, or has to undergo a long occupational therapy regimen or train up for a new specialty or profession as a result of his or her disabling illness or injury. The insured individual can gradually transition back to work, while the residual disability rider makes up a significant part of the lost income.
When do residual disability benefits apply?
It’s important to look at the language in the policy when comparing residual disability benefits between two competing policies. Broadly speaking, there are two different criteria you can choose:
The difference between the criteria If you own a policy with a residual disability benefit based on loss of time and duty, rather than on loss of income, your benefit will cease as soon as you go back to working full time, even if you are still working at a reduced capacity and you are still experiencing a significant loss of income.
Some policies require that you show both a loss of income and a loss of time/hours worked or duties. These policies will not pay a benefit, even if you have taken a big income hit due to your disability, if you’re able to go back to showing up full time and taking up your normal duties.
It’s better to have a residual benefit that relies on only one of these criteria. A benefit that requires both a loss of income (20 percent or more is typical) and a loss of time or duty is much more difficult to qualify for, and therefore much less likely to pay benefits.
However, all things being equal, a loss of income rider or benefit will likely have a somewhat higher premium.
For physicians, the loss of income criteria is often very important – especially for those in private practice, who may have to work extra in order to ramp up to their previous income levels.
You may see a cap on the number of months a residual disability benefit may remain in force. Some policies will let you choose between a six-month and twelve-month residual disability benefit period.
A recovery benefit will continue to pay a portion of lost income over time while the physician works to rebuild his or her practice. For example, a physician may have a severe disability that knocks him or her out of practice for a year or two. However, in many cases, the physician can eventually beat the illness and return to work fully functional and full time. But it takes time to ramp a patient load back up, and to get a private practice back on its feet. Even when a physician is back to work 100 percent, there may still be an extended period of time before the doctor’s practice is back to where it was, delivering the same income to the doctor as it did before the disabling injury or illness.
A properly-designed recovery benefit will pay follow-on benefits to the insured physician even after the physician is fully recovered, until his or her earnings have recovered, up to the limits of the policy.
A physician who works on staff and who can quickly get rehired somewhere at full salary after recovering from a disability may not need a huge or long recovery benefit. But it can be a tremendously important issue for a physician in private practice.
Residual and recovery benefits are often not well understood by physicians. If you would like to have us review your current insurance coverage for vulnerabilities, or to make improvements to your insurance plan, call DoctorDisability.com today. We are located in San Clemente, California, but we work with medical professionals and their families in all 50 states.
Contact us at 866-899-7318, or email us from this page.
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