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How to Insure Your Income: Key Differences

Traditional disability income policies define total disability in terms of job duties or functions. The claims process is triggered by the inability to perform duties of a job. With these policies, benefits cease when the claimant returns to work, even on a part-time basis.

Residual disability income benefits are triggered by a loss of predisability income. So, they offer an incentive for the insured person to return to work, because benefits will be continued in proportion to his or her loss of income.

The following chart illustrates a hypothetical claim -- if it had been made under a residual policy:

Residual Disability Income Benefits

Based on pre-disability income of $5,000 monthly $2,500 total disability benefit, 30-day EP, to age 65 benefit period Residual Lost % of Month Earnings Lost Income Benefits

1 $5,000 100 $0 2 5,000 100 2,500 3 5,000 100 2,500 4 4,500 90 2,250 5 4,000 80 2,000 6 3,000 60 1,500

The residual -- also called loss of income -- approach is commonly offered to lower-risk occupations. Depending on the insurance company, it may or may not be offered to higher-risk occupational groups.

Generally, the provisions of a residual policy will be similar to those of the traditional contract. There will be an elimination period, benefit period, etc.

One key mechanical difference: Total disability is usually defined as the inability to perform the duties of your occupation. The definition also may be expanded to include eligibility for residual disability benefits, as follows:

Following a period of total disability, the insured may be eligible for residual benefits if, due to disability, there is a loss of at least 20 percent of pre-disability income.

This definition provides total or residual benefits if you are totally or residually disabled from doing your job. The residual benefit requires a minimum loss of 20 percent of pre-disability income.

On the other hand, if the insurance company removes the your occupation element of the total disability definition (as some do), it creates a so-called pure residual definition. This definition looks something like this:

... the ability to perform some, but not all, the duties of your occupation and, as a result of disability, the insured's earned income is reduced by at least 20 percent of pre-disability income.

In accordance with this definition, 100 percent of the total disability benefit is paid for disabilities that result in 100 percent loss of pre-disability income; 80 percent of the total disability benefit is paid if you suffer an 80 percent loss of pre-disability income; etc.

There are many possible variations of these definitions. Some policies define total disability in terms of working full time and residual disability in terms of working part time.

Most policies also will require that you be under the care of a licensed physician during the period of disability.

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