The Difference Between Total and Residual Disability
When you’re comparing different options for disability insurance, be on the lookout for the areas where policies are likely to differ. Don’t assume that terms are defined in the same way from one policy to another. Pay close attention to the exact manner in which key policy terms, such as total disability and residual disability are described. That’s the only way you can be certain that you truly understand the terms and conditions of each policy option.
- Total Disability: Some policies use an “own occupation” definition of total disability, while others use an “any occupation” definition. The best policies use the own occupation definition, which means you’ll be considered totally disabled if you’re unable to continue working in your actual occupation. If your policy uses the “any occupation definition” unlike the “own occupation” definition, earnings from another occupation may offset your insurance benefit.
- Residual Disability: Pay attention to whether or not your policy’s residual benefit rider continues to pay only until you are able to return to your usual work schedule and duties or if you’ll keep receiving benefits until your income returns to 85% of the level it was prior to the disability.
Residual Disability Coverage Provides Partial Disability Protection
Some disability insurance policies pay benefits only in the event of a total disability. While a total disability is certainly devastating, partial disabilities can also result in a significant reduction in income. It’s a fact that your ability to earn a living can be seriously curtailed, temporarily or permanently, in the event of a partial disability. That’s why the best disability insurance policies include a provision for residual disability benefits.
It’s a good idea to look for a policy that pays residual disability benefits. However, don’t assume that residual benefits are all the same. Before you purchase a disability policy, find out whether it uses a time and duty definition or an income definition of residual benefits.
- Time and Duty Definition: Some policies pay residual benefits until an individual is able to return to his full work and duty schedule. This means that you’ll still receive a percentage of your disability benefits when you return to work part time. Your benefits will continue until you go back to your pre-disability work hours, performing the same job functions you were responsible for before experiencing medical problems. This option may be fine for individuals who work in hourly wage jobs, but often is not sufficient for professionals, commissioned sales people, entrepreneurs, and others whose earnings are performance based.
- Income Definition: If your earnings aren’t specifically based on how many hours you work each day or week, you’re better off with a policy that offers an income-defined residual benefit. For example, if you own and operate a service-oriented business or sell a product that has a long sales cycle, it can take a long time for you to build your earnings back up to the level they were before you became unable to work. You could be working a full time schedule, performing your usual duties, for months – or even longer – before your income fully bounces back from the time you had to spend away from the job. If your disability plan uses the income definition, you’ll keep receiving proportional benefits until your earnings return to the level they were before your bout with a disability.
Many disability claims are of the residual disability nature, so be sure you’re protected with the right coverage.