Residual Benefit

What is Residual Benefit?

A residual benefit is provided by disability insurance that provides the policyholder with part of the total benefits outlined in the policy. The residual benefit is typically calculated as a percentage of the total disability benefit.

Understanding Residual Benefits

Residual disability policies pay benefits according to the amount of income you have lost because of your disability. These policies pay benefits even if you can work part-time and are not totally disabled. The benefit is based on the percentage of income you earn working part-time in relation to what you used to earn when working full-time.

Key Takeaways

  • Residual disability represents the income lost when a person goes on disability insurance.
  • Typically, recipients of residual disability benefits work part-time but often are unable to work full-time due to a disability.
  • A residual disability benefit is different than a disability benefit.
  • In order to collect residual benefits from disability insurance, policyholders must be able to provide sufficient information regarding his or her disability. 

Disability insurance provides benefits to policyholders, who are injured or unable to work because of health issues. Policies provide a base benefit, which is the monthly amount of income that the policyholder will receive if he or she is unable to work. In order to receive the benefit, the policyholder has to demonstrate that he or she cannot work at all. The benefit may prove ineffectual if the policyholder goes back to work. A residual benefit allows the policyholder to receive some of the disability benefit, once they get back into the workforce – even if only part-time.

Most companies require a loss of income of at least 20 percent compared to your pre-disability income in order to qualify for residual disability benefits.

Example of How Residual Benefits are Calculated

Residual benefits are typically calculated as a percentage of both the policyholder’s loss of earnings and the benefit that the policyholder would receive if he or she was unable to work. For example, say a worker who has a disability policy sustains an injury that prevents him from working full-time.

The worker with a residual disability is physically able to be on the job part-time and is able to earn 60% of the amount that he used to earn. The disability policy pays out $1,500 a month as normal benefits. The residual benefit is calculated by taking the amount of income loss (which is 40%) and multiplying it by the normal disability benefit of $1.500. The resulting residual benefit comes to $600 a month (40% x $1500).

Policies may restrict the amount of part-time earnings relative to full-time, pre-disability earnings. This restriction may be a maximum benefit per month or a maximum percentage of pre-disability earnings. For example, an employee may have purchased a policy with a monthly maximum benefit of $5,000 but may have a pre-disability income of $80,000. The difference between pre-disability income and annual benefits is $20,000 ($80,000 – $60,000), or a cap of 75%.

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