Updated Dec. 21, 2017
If you become disabled and can’t work, long-term disability insurance is crucial. But what if you can go back to work — to an extent? It’s not uncommon to recover from a disability without being able to work in your previous capacity.
That’s where a residual disability benefit rider comes in handy. It provides partial benefits when you can't work at the level you did before your disability.
What is a residual disability benefit?
If you purchase a disability insurance policy with own-occupation coverage, most disabilities are cut and dry. If you get ill or injured and can’t work your own job, you collect a disability benefit. This coverage has a comprehensive definition of what it means to become disabled.
But that’s only if you can’t perform the duties of your own job at all. There are some instances where you can go back to work, but you aren’t as productive as you were before.
You can’t work as many hours, like a lawyer who works billable hours, a physician who performs surgical procedures or a salesman who travels.
Or you’re going through chemotherapy and only work a few days a week.
Or your occupation allows for administrative work in your field but you aren’t performing the same tasks you were before.
Or maybe you just can't get as much done at work.
In these cases, you can work but can't make as much money as before, putting your financial well-being at risk.
Adding a residual disability benefit rider to your policy means you won’t get the full benefit, but you’ll get a partial benefit commensurate with your lost income.
Residual benefit riders keep disability policies from being black and white, disabled or not. They allow for a gray area where you are kept financially whole when you’re still working in your field, but at a loss.
How residual disability benefits work
Your partial benefit is the percentage of your income lost multiplied by your total monthly benefit amount. There’s usually a minimum payment amount outlined in your policy.
After satisfying the elimination period, the carrier pays the partial benefit to cover the lost income.
Recovery benefits are also provided with most residual benefit riders. After you recover from a partial disability and return to working at full capacity, you may still not be at full income. For example, if you’re a small business owner who lost some clients while you were disabled, you might need more time to build back up to your pre-disability income. Recovery benefits can cover the gap while you do so.
Most carriers have a basic residual benefit portion built into the policy or added as an optional rider for extra money. An enhanced option that kicks in sooner is ideal for workers who might experience more measurable losses, like lawyers, business owners and medical field employees.
Everyone should at least purchase a basic residual benefit rider with their disability policy.
Qualifying for a residual disability benefit
There are three ways carriers measure a partial disability: loss of duties, loss of time or loss of income.
- Loss of duties — When you can work but can’t accomplish duties that make up 20% or more of your work.
- Loss of time — When you can do all of your duties but can’t do them for more than 75% to 80% of the time you previously spent doing them.
- Loss of income — When you experience at least a 15% to 20% loss of income because of injury or illness.
If your loss is 75% to 80% of your income or higher, most carriers consider you totally disabled and pay the full benefit amount.
There are many scenarios when a residual benefit policy would come into play — meaning there are a lot of ways becoming disabled can lower your income. This can put your financial plans at risk.
If you think you’re less susceptible to disability since you work a white-collar job, think again. Most disabilities are the result of illness rather than injury, so anyone can benefit from long-term disability insurance. For people who earn a high income and made a large investment in their career in the form of school and training, like lawyers, doctors and software engineers, riders like a residual benefit provide an extra layer of protection.
Image: Eva Katalin Kondoros