Residual or partial is a rider that is offered by almost every disability insurance carrier. This rider is important because in many cases, those who are disabled can work part-time but not full-time. The residual or partial rider pays a percentage of monthly earnings, so that some disability insurance benefits are available when the insured returns to work part-time – allowing a more gradual return-to-work experience.
When insurance agents see that rider listed on illustrations from several carriers, they may assume that all residual/partial benefits are equal. In fact, the meaning of “residual” actually varies quite a bit by carrier.
Consider the following scenario:
Your client is a 56 year old contractor with disabling back injury. He has continued to work on a part-time basis, and is able to do all of his job duties. However, he can only manage 70 percent of his usual work hours. Thankfully, he had numerous jobs going before his disability so he didn’t see a decrease in his income for about six months.
Assuming his claim lasts for one year, and he has a benefit of $5,000 per month, how might his benefits vary by carrier, depending on the residual/partial rider variations? Below are the benefit amounts paid by three different carriers in this scenario. As you can see, there is an astounding $27,600 difference!
- White Collar Carrier: $39,000 payable
- Blue Collar Carrier #1: $14,820 payable
- Blue Collar Carrier #2: $11,400 payable
Why the disparity in the disability insurance benefit amounts?
White Collar Carrier: With this carrier, loss of time from work alone is enough to qualify for the residual/partial benefit during the initial period of six months. During the initial period, he is eligible for 100 percent of his monthly benefit. After the initial period, a loss of income is required and the benefit amount payable is based on loss of income. For this scenario, we assumed his 30 percent loss of time resulted in a 30 percent loss of income after six months.
- Initial six-month period: 6 months x $5,000/mo. benefit= $30,000
- Extended period: Months 7-12 = 6 x ($5000/mo. x 30%)= $9,000
- Total benefits received with white collar carrier: $39,000
Blue Collar Carrier #1: This carrier’s residual benefit requires a loss of income and a loss of duties. Loss of time alone is not enough to qualify for a residual benefit. This client would be able to qualify for some benefits under the partial which allows for benefits with a time loss of 25 percent or more. The partial benefit pays 50 percent of the base benefit amount for six months. The social insurance benefit is not included in the calculation of residual or partial benefits. Again, we assumed his 30 percent loss of time resulted in a 30 percent loss of income after six months. This carrier also has the language that after two years of residual payments, you would only qualify if unable to do one or more substantial and material duties of any gainful occupation, not the client’s own occupation. The maximum payout under residual is five years.
- Plan Design: $3,800/mo. of base benefit with $1,200/mo. of social insurance
- Initial six month period: ($3,800/mo. x 50%) x 6 months= $11,400
- Months 7-12: ($3800/mo. x 30%) x 6 months= $6,840
- Total benefits received with blue collar carrier #1: $18,240
Blue Collar Carrier #2: With this carrier, loss of time can trigger the partial benefit. However, the insured must have a 50 percent loss of time or have a loss of income, so benefits would not be triggered for this client until a loss of income could be documented. They also only pay residual and partial benefits on the base benefit amount. For the first six months of a residual claim they will pay at least 50 percent of the base benefit. If the residual disability continued past two years, this client would not be eligible for any additional benefits. Once the insured reaches age 55, he must have a total disability of at least 180 days to have a residual payout longer than 24 months.
- Plan Design: $3,800/mo. of benefit with $1,200/mo. of social insurance
- Initial six month period: No loss of income, so no benefit payable
- Months 7-12: ($3800/mo. x 50%) x 6 months= $11,400
- Total benefits received with blue collar carrier #2: $11,400
These are generalizations, meant to illustrate the importance of disability insurance contract language so please check the specific product language of the carrier you are selling (or call and ask us)! Also, I firmly believe that some coverage is always better than none at all. If the premium of a white collar carrier is prohibitive, then it would be in the client’s best interest to have a blue collar type DI policy even if the definitions are not as comprehensive.
As always, call on DIS for the advice you need to protect your clients’ paychecks! And, subscribe to our blog at the top of this page for more disability insurance sales tips. Do you have other DI policy language tips or lessons learned? Share them by posting to our comments below.