DISABILITY INSURANCE – DURING A DISABILITY #2

As discussed in the previous issue, there are many levels of disability.

Unlike death, which is either a case of “you either ARE or you ARE NOT,” disability is very much a “Where are you on the scale?” This actually has at least two causes:

(1)   Many disabilities progress from one level to the next – either getting better or worse, depending on the underlying cause. Examples: (a) cancer or MS generally get worse over time – going from a level which may have little or no impact on your ability to work to one where you are completely unable to work; (b) if you have a heart attack, generally you will not be able to work at all – you may be hospitalized and then spend time at home recovering. Then you will probably gradually return to full time work.

(2)   Totally independent of the nature of the disability, we have the nature of the person who is disabled. Some people will try to work from their hospital bed. I actually know a broker who called to discuss a pending case WHILE IN THE EMERGENCY ROOM OF THE HOSPITAL HAVING A HEART ATTACK! Let me just mention the concepts of pain threshold and motivation. These concepts are totally individual and subject to extreme variation.

To simplify the handling of this issue, the industry has developed two approaches. The first is the concept of total disability, which I discussed in my previous blog.

In this blog, I will address the concept of non-total disability.

There are actually two methods of dealing with this: partial disability and residual disability.

1. Partial disability – this approach examines which duties you can and cannot perform and/or how many hours you are able to work. It does NOT consider the income that you are earning. Generally, you have many choices as to how long benefits will be paid out – 6, 12 or 24 months; for 5 years or until age 65. The amount payable in this case is generally 50% of the amount payable in the event of total disability.

            For example, if the policy pays $4,000/month for a total disability, it would pay $2,000/month for a partial disability. If partial disability benefits are payable beyond 24 months, they GENERALLY reduce to 25% of the total disability benefit – or $1,000/month in this case.

2. Residual disability – this approach examines the income you lose due to your disability. It does not concern itself with what you can do or how long you can do it, but merely with the reduction in income. (Another way to differentiate the two approaches is: partial disability looks at capability while residual disability looks at efficiency.) If your income is reduced by less than 20%, no monthly benefit is payable. If the reduction in income is between 20% and 80%, a percentage of the benefit for total disability is paid for residual disability.

            For example, a 40% reduction in income would result in a payment of 40% of the total disability benefit – or $1,600/month using the previous example. The amount of the payment would vary each month depending on the level of income earned in that particular month. If the reduction in  income is 80% or greater, the full benefit is payable. This would allow the client to earn some income without affecting the amount of payment.

My next blog will deal with how the companies calculate what you WERE earning prior to disability, which gives the basis from which the loss is determined.

So, we have two approaches. Is one better than the other? Frankly, it depends on the client. If their income is directly linked to their efforts (e.g. they are in sales or are a fee for service professional), there would be little doubt that residual plans would more accurately compensate for any loss. On the other hand, if they own a company with a significant number of employees, they may possibly be sheltered from a reduction in income by the existence of those employees, therefore partial benefits might be the superior choice. Certainly partial benefits may be easier to collect, as there is no complicated accounting required in order to determine the loss of income.

Some products offer both features and allow you to choose the one which best suits your needs at the time of a claim, taking into account changes in work patterns over a career. Others mandate a choice at time of issue, which offers less flexibility.

The most important thing is that you have SOMETHING – be it partial or residual – so that you are not penalized for trying to work – or for the nature of your disability.

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