Disability insurance: residual/recovery benefit.
Subject: Disability insurance (Laws, regulations and rules)
Disability evaluation (Management)
Authors: Noca, Joe
Wood, Josh
Pub Date: 01/01/2012
Publication: Name: West Virginia Medical Journal Publisher: West Virginia State Medical Association Audience: Academic Format: Magazine/Journal Subject: Health Copyright: COPYRIGHT 2012 West Virginia State Medical Association ISSN: 0043-3284
Issue: Date: Jan-Feb, 2012 Source Volume: 108 Source Issue: 1
Topic: Event Code: 930 Government regulation; 940 Government regulation (cont); 980 Legal issues & crime; 200 Management dynamics Advertising Code: 94 Legal/Government Regulation Computer Subject: Government regulation; Company business management
Product: Product Code: 6323000 Income Loss Insurance; 9105313 Special Disability Insurance NAICS Code: 524114 Direct Health and Medical Insurance Carriers; 92313 Administration of Human Resource Programs (except Education, Public Health, and Veterans' Affairs Programs) SIC Code: 6321 Accident and health insurance
Geographic: Geographic Scope: United States Geographic Code: 1USA United States
Accession Number: 276187095
Full Text: In our last edition, we discussed the merits of an own occ definition of disability versus the modified own occ or own occ and not working definition of disability. The definition of disability is clearly the most important contract benefit in a disability policy. A very close second as far as benefits within a disability policy are concerned is the Residual/Recovery benefit.

The basic purpose of a residual rider is to help supplement current income when an insured is returning to work from being off on a claim. In the case of Union Central, a residual claim is initiated when an insured can perform some but not all of the substantial and material duties of their occupation and has a loss of income of at least 15%, or is unable to work in their occupation more than 80% of the time as was usual prior to the start of their claim. If the insured has at least a 75% loss in pre-disability earnings, it is considered a total loss and their full benefit is paid. For the first six months of a residual claim, at least 50% of their total disability benefit will be paid. The residual disability benefit amount is calculated as follows:

Loss of monthly earnings (current income)/(divided by) prior monthly earnings (before the claim) x your base monthly benefit = Residual Monthly Benefit

Let's illustrate that formula with real numbers in the following example:

Dr. Smith is a pediatrician that had been earning $240,000 annually prior to his heart attack two years ago. Dr. Smith has rehabbed himself to the point of being able to return to work, however, his physician is only allowing him to work 20 hours per week initially. In this case, here is how the residual benefit is calculated:

At 20 hours per week, Dr. Smith's income is $10,000/mo. His income prior to his disability claim was $20,000/mo. With an annual income of $240,000, Dr. Smith qualified for $10,600/mo in disability benefits. Using the above formula, the calculation is

$10,000/mo in current earnings/ (divided by)$20,000 in pre-disability earnings x $10,600/mo in disability benefits = $5,300/mo in a residual monthly disability benefit

As long as Dr. Smith continues to experience an income loss of 15%-20% while working part time he will collect a residual monthly benefit until such time he is back to earning 80%-85% or more of his pre-disability earnings.

The more significant application of the Residual/Recovery benefit is if the insured has returned to work and is performing the substantial and material duties of their occupation more than 80% of the time as was usual prior to the start of their disability claim, a residual monthly benefit will continue to be paid as long as they continue to experience an income loss of at least 15%. This residual/recovery benefit will continue to be paid until such time they no longer have the 15% loss in income or they reach the end of their benefit period.

The built in recovery benefit as part of the residual rider itself is a critical component of the language in a disability policy. Several carriers in the disability marketplace today have very limited recovery benefits as part of their policies. A few of the carriers, including Union Central, have a recovery benefit built in to their Enhanced Residual Rider as a benefit in the policy. With several carriers, their recovery benefit has to be added by rider.

Not all residual/recovery benefits are alike. Most residual riders are trigger benefits with either a 15% or 20% loss in pre-disability income. When it comes to the recovery benefit, it can vary significantly from carrier to carrier. In the case of Union Central, an insured can potentially be carried on a recovery claim for their entire benefit period. There are a few other carriers with similar benefits, some of which are built in and some which have to added by rider. Still, other carriers have very limited recovery benefits in their policies, from six months to a maximum of three years. For medical professionals, the recovery benefit in a disability policy should be considered a difference maker when evaluating disability policies. If a medical professional will never be able to return to their pre-disability earning power because of limitations resulting from their claim, the recovery benefit is the benefit that will continue to supplement their income for potentially as long as the remaining portion of their benefit period. If the recovery benefit is limited from a low of 6 months to a maximum of 36 months, as with a few carriers, the insurance company will cease paying the supplemental recovery benefits at the end of those time frames. That could produce a significant reduction in total monthly earnings.

Our recommendation is to look at your current policy to see if there is language that mentions anything about a recovery benefit. If so, check to see if there is a time limitation (12 months, 24 months, 36months, etc) or is there language supporting the potential for the "remaining benefit period" (if you have an age 65 benefit period, and age 67 benefit period, or an age 70 benefit period as part of your policy).

If it has been some time since you last reviewed your disability policy, especially to confirm whether or not you have a Residual/Recovery benefit in the policy, we encourage you to do so. As part of the services being offered by the West Virginia Medical Insurance Agency and its partnership with Union Central, Josh Wood can make a quick review of your disability policy and help you better understand this feature/benefit of your policy. You may reach Josh at 304-925-0342 x33 or josh@wvsma.com


by Joe Noca, Union Central, and Josh Wood, WV Medical Insurance Agency
Gale Copyright: Copyright 2012 Gale, Cengage Learning. All rights reserved.