Understanding Residual Disability Benefits: Are They Worth The Cost? Part 1 – The Basics
Disability insurers often market “residual disability” or “proportionate disability” benefits to doctors as an added benefit of a disability insurance policy. “Residual disability” is industry parlance for a partial disability and the residual disability benefit is typically attached as a rider to an individual disability policy.
Doctors pay additional premiums for these residual disability riders, so it is important for them to determine whether the benefit they are receiving is worth the price they are paying. This series will explain each component of the residual disability benefit, examine how residual benefits differ between insurance companies and identify some of the problems associated with residual disability claims.
Residual disability is generally defined as a condition that either prevents a doctor from working as long as he previously did or one that prevents a doctor from performing all of the duties he previously did. The insurance company will pay the claim on a pro rata basis, based on what it determines to be the doctor’s loss of income.
The formula for calculating residual disability benefits varies from company to company, but it typically begins with a calculation of the doctor’s pre-disability “prior monthly income” (PMI). The insurer will next examine the doctor’s “current monthly income” (CMI), for every month in which the doctor claims to be disabled. Then, the insurer subtracts the current monthly income from the prior monthly income and divides the result by the prior monthly income. That ratio is then multiplied by the maximum benefit amount (MBA) to arrive at the residual disability benefit. The formula can be illustrated as follows:
(PMI – CMI)/PMI x MBA = Residual Disability Benefit
While this is the general rule, each insurer defines prior and current monthly income differently, which can result in the same doctor with the same financial information receiving widely different benefit amounts from different insurers. To further complicate matters, some insurers will have different minimum and maximum loss of income amounts. Some examples of the differing loss of income requirements include:
- Berkshire/Guardian: Requires a minimum 15% loss of income before any benefits are payable, only pays actual loss of income thereafter.
- Northwestern Mutual: Requires a minimum 20% loss of income before any benefits are payable, pays full MBA if there is a loss of 80% or more.
- Unum/Provident/Paul Revere: Requires a minimum 20% loss of income before any benefits are payable, pays full MBA if there is a loss of 75% or more.
- MetLife: Requires a minimum 20% loss of income before any benefits are payable, pays full MBA if there is a loss of 80% or more.
Even with policies issued by the same insurer, residual disability riders have changed over time. The loss of income requirements in your policy may be different than these, depending on when it was issued. If you are in a situation where you are contemplating filing a disability claim, whether for total or residual benefits, make sure you obtain a copy of your policy and review it carefully to understand the benefits to which you may be entitled.
