In previous posts, we described how traditional and residual disability income insurance works in terms of paying benefits. Now, let’s look into some key differences between the two types of policies.
Traditional coverage pays when the insured is totally disabled and does not work. Residual pays not only total disability, but a proportionate amount of lost income when the insured returns to less-than-full-time work, provided there is at least 20 percent of lost pre-disability income after returning to work.
Definition of Loss
Traditional coverage pays benefits when the insured has lost the ability to do his or her job for a period of time due to illness or injury. Residual coverage pays benefits according to the loss of pre-disability income due to illness or injury.
Some policies may remove the “your occupation” part of total disability, which makes the policy residual – it pays 100 percent for total disability, 80 percent for 80 percent of total income loss, etc. The policy may have an expended definition of total disability, so it’s important to consider that.
Some policies can be strict or liberal in its residual income benefit – if you worked 40 hours per week prior to a disability and when you return to work you can do your job but only 35 hours, the policy may not consider that part-time and thus may not pay residual benefits. That would be an important point to consider when looking for the right policy for you.
As has been stated before, disability income insurance can come in many different shapes and sizes – and even in different types like total disability coverage or residual (Partial) disability coverage. There are policies that are exclusive, others that include both types of coverage. You can check with your insurance agent or broker to determine whether your occupation and financial situation would dictate one or both types of coverage. It’s complete protection of your assets, in either case, but it is important to know the differences so you don’t have the wrong coverage in force.