Residual Disability Benefits are paid to you when you are considered partially disabled.
How Do I Qualify for Residual Disability Benefits?
There are 3 factors:
Loss of Income – When you lose at least 15-20% of your income as a result of an illness or injury and;
Loss of Time – When you can perform all of your assigned duties but cannot work full-time or;
Loss of Duties – When you can work but cannot complete all of your usual duties.
Most insurance companies will consider you totally disabled once the loss reaches 75-80% or more of your income and they will pay the full benefit amount stated in the policy.
How is the Residual Benefit Calculated?
Whatever your percent loss is, you will receive that same percent of your total benefit.
For example, let’s assume:
Your income prior to the disability is $10,000/mo.
Your disability policy has a benefit for Total Disability of $6,000/mo.
Then, due to a disability, you are only able to earn $7,000/mo.
Your “Percent Loss” is 30% ($3,000).
Thirty percent of your policy’s “$6,000 Benefit for Total Disability” is $1,800 (30%x$6,000).
Your Residual Benefit should be $1,800/mo.
Remember, you ARE still working and earning $7,000/mo. Your total “in-flow” will be $8,800/mo. ($7,000+$1,800).
If you paid the premium with after-tax dollars, the $1,800 will be received tax-free, so considering taxation, the modest Residual Benefit payment almost makes you “whole” for income.
Depending on the insurance company, the residual disability benefit may be included, or it can be added with a rider that will cost an additional premium.
When Can I Collect Residual Disability Benefits?
Your disability policy will have an “Elimination Period” (also known as a Waiting Period). Most common is an Elimination Period of 90 days. Once you meet the criteria for being considered Totally and/or Residually Disabled for the length of the Elimination Period, you will become eligible for benefits.
Different Variations of Residual Disability Riders
Most carriers offer different variations of Residual Disability Riders, each with different features and cost. From “most comprehensive and expensive” to “least comprehensive and expensive,” those variations are typically named:
- Enhanced Residual
- Basic Residual
- Partial Disability Rider
Typically, a small business owner, and especially one whose income depends on a developed client base should consider Enhanced Residual. Examples would be dentists, family practice physicians, and attorneys.
Basic residual is a good choice for W-2 employees.
Partial is a good choice for a W-2 employee whose budget may not allow for Basic Residual. Partial is less expensive primarily because days of “Residual” disability do not count towards meeting the Elimination Period. To receive benefits under a Partial rider, you must first have received benefits for “Total Disability.”
The main advantage of the Enhanced Residual and Basic Residual riders is days of Residual disability count toward meeting the Elimination Period, so you never need to be “Totally Disabled” to receive a benefit.
The Bottom Line
Most disability claims are a result of illness instead of injury and many illnesses can gradually cause a disability, so it’s important you have this coverage in your policy. Residual disability benefits vary by company, so discuss with your agent any caps and limits on your residual benefits coverage.