How to Insure Your Income: Benefits Calculation
You have control over one critical piece of how your disability income benefits are calculated. Within some limits, you can decide whether or not -- or how quickly -- to return to work. But, aside from the issue of how quickly you return to work, the insurance company controls most of the process.
Because of the numerous other factors influencing any disability claim, insurance companies can use some subjective judgment in determining the size of benefit they will pay in any given claim. But this discretion isn't absolute. The company's calculations have to follow the rules established in the policy.
A key issue in this calculation: residual benefits. A disability income policy that pays residual disability benefits provides an incentive for you to return to work, because it pays proportional benefits. A total disability only policy implies that you cannot return to work for any length of time without losing all benefits.
Residual policies may require a minimum loss of 20 percent of pre-disability income before benefits are provided. So, a 5 percent or 10 percent loss of pre-disability income would not result in any residual benefit.
Conversely, many insurers will pay 100 percent of the total disability benefit if you have suffered more than an 80 percent loss of pre-disability earnings. So a person with a 90 percent loss of pre-disability income would receive a residual benefit equal to 100 percent of the total disability benefit.
In terms of claims, an important factor is how the insurance company views pre-disability income. Generally, a company may require evidence of income by means of tax returns or copies of W-2s.
On the other hand, tax forms don't always tell a complete story. Certain kinds of employees -- commissioned sales representatives are a good example -- have earnings that fluctuate. In these situations, pre-disability income may be defined as the average earned income for a specified period (such as two years) prior to the onset of a disability.
