What is a Residual Disability Insurance Rider?

Physician’s insurance can have complications.

Just when you think you understand what disability insurance is all about, you learn that’s there’s yet another curveball: optional riders. While most policies may seem straightforward, there are almost always optional add-ons that can provide you with even more benefits.

Today we’re focusing on disability insurance and the residual disability insurance rider.
What it is, why you need it, and what it covers.

Keep reading for our full guide to the residual disability insurance rider.

Why You Need Disability Insurance

Of all the various types of insurance that physicians need, disability insurance is one of the most important.

Why?

Because it will protect you and pay you benefits in the event that you are injured, ill, or disabled in a way that prevents you from doing your job.

Most disability insurance policies pay about 60% of your total income. So it’s no surprise that some policyholders choose to add optional riders in order to reap more disability income.

Basic disability insurance is a must-have for every physician. However, adding two or three extra riders is a way to enjoy even more protection. And since those riders offer substantial benefits in addition to your standard policy, they usually cost extra.

How Much Disability Insurance Costs

Most physicians spend between 2% and 5% of their gross income on disability insurance premiums. And every additional rider you select will cost you a little bit more.

The cost of disability insurance premiums (and the cost of optional riders) vary based on a series of determining factors, such as:

• Your specialty
• Your age
• Your health
• Your state
• How your policy defines disability
• How much disability coverage you need
• How long of an elimination period you have (the time between the day you become disabled and the day you can start collecting benefits)

On average, a typical policy with a $10,000 per month benefit amount costs between $200 and $500 per month. Most insurance policies cap their standard policies at a benefit of approximately $15k to $17k per month.

The more riders you add, the higher your monthly premiums will be.

What Are Disability Insurance Riders

There are some key disability benefit riders that many physicians choose to add to their base policies.

• Cost of Living Adjustment (COLA) rider — allows you to increase your monthly benefit as the cost of living increases year over year.

• Student loan rider — covers the cost of your monthly student loan payments. This is an attractive rider for young physicians who are still paying off their educational debts.

• Future purchase rider — offers you the option to buy additional coverage at a later date, regardless of your health conditions.

• Catastrophic disability rider —  pays even more benefits. To qualify, you must suffer a catastrophic disability and be unable to perform daily functions for yourself.

These four riders all offer additional benefits if you become disabled.

But to collect on these, you have to meet the definition of “disability” that your policy sets forth. And that means that you either cannot work at all or cannot work in your specific field of medicine.

The residual disability rider, however, works a little bit differently.

What is the Residual Disability Rider?

The residual disability rider is unique in that it allows you to collect a portion of your benefits even if you’re not completely disabled.

Investopedia describes it as follows:

“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.”

In other words, it’s a way to collect some of your benefits without being totally disabled.

Why the Residual Disability Rider is Important

There are a variety of reasons why physicians choose to add the residual rider to their disability insurance policy.

For one, it makes it easier to reap some of the benefits of your policy. It also allows you to get around the stringent definition of disability that most policies put in place.

There are two main types of disability insurance policies: own occupation and any occupation.

But what if your disability only requires that you cut back on some of your duties or work a few less hours each week?

That’s where the residual rider comes into play.

In most cases, to collect on a standard disability insurance policy, you need to be completely disabled and completely unable to work. In other words, you have to lose your entire income in order to receive your benefits. Which are usually about 60% of what you were earning.

But not everyone becomes disabled in such a way that they cannot work at all.

With the residual rider, you’ll have the ability to work part-time and still collect a portion of your benefits

For example, if you’re undergoing chemotherapy sessions and can only work one or two days a week, you can collect benefits with the residual rider. It will also pay you if you lose the use of your hand and are unable to perform surgery but can still work in a hospital administration role.

Residual benefits cover you if you suffer a significant loss — but it doesn’t have to be a debilitating loss.

According to the Council of Disability Awareness, 5.6% of American workers will experience a short-term disability that lasts six months or less. More than one in four 20-year-olds are likely to suffer a disability that keeps them out of work for at least one year before they reach retirement age.

The most common reasons for long-term disability claims are related to musculoskeletal disorders. These include conditions such as back pain, spine and joint disorders, and arthritis. And an estimated 126.6 million Americans are affected by one of these conditions.

The bottom line is this:

There is a chance that you could suffer a disability that would prevent you from working your current job or force you to cut back on your hours. And in either of these scenarios, a standard disability insurance policy will not pay you benefits.

But the residual rider will.

The Difference Between Total Disability Benefits and Residual Disability Benefits

As we’ve already discussed, you can collect residual benefits without being completely disabled. But it’s important to know how most policies define what being disabled means.

There are certain conditions that almost always qualify you as disabled. With these conditions, you can collect on your standard disability benefits.

These conditions include the total loss of sight or speech or hearing. The loss of both hands, or both feet, or one hand and one foot also fall into this category. With some policies, it can even be a temporary situation while others require it to be a permanent condition. Any of these also allow your elimination period to be waived so that you don’t have to wait at all to start collecting income benefits.

Typically, if you meet these conditions, you will be able to receive the insurance benefits as set forth in your standard policy.

In addition, you either have to be unable to perform the duties of your occupation or be unable to perform the duties of any occupation. And there are hundreds of other conditions that you could face that would render you unqualified to receive benefits.

And that’s why the residual disability rider is so important

To qualify for the benefits of this rider, most insurance companies simply require that you have an income loss of 20%. So if you were making $200,000 per year before your disability and can only make $160,000 now, you should qualify for your residual benefits. Many policies are even stronger and only require a 15% income loss to qualify.

Depending on your policy, you may first have to qualify for total disability before you can collect residual benefits. (The length of time required as “totally disabled” varies among policies). It’s always best to seek the advice of a physician’s financial planner who can help you navigate complicated policy details such as this.

But loss of income isn’t the only thing that determines how and when you may qualify for your residual benefits.

Your loss of duties is also a factor. In order to qualify, some require that you’ll need to be unable to perform duties that comprise at least 20% of your work.

Loss of time factors in as well. If you can do all of your duties but can’t do them more than 75% or 80% of the time you used to do them, you may qualify.

How the Residual Disability Rider is Calculated

We’ve talked a lot about what the residual disability rider is, but we haven’t yet covered how much it costs. Unfortunately, quoting a specific price is impossible. There are many variants that insurance companies use to determine your rates.

And while calculating the cost of the rider varies, calculating the payout is straightforward.

We calculated monthly benefits under a residual rider as follows:

The amount of income loss as a % of total pre-disability income multiplied by the total disability payout (if you were to become completely disabled).

For example, let’s say your total monthly payout for total disability is $10,000 per month and you suffer a 20% income loss. You can collect $2,000 per month in residual benefits.

And while this may not seem like very much, it can be enough to sustain you during your illness or injury. This money can be used to supplement your income until you’re able to go back to work making the full amount you were earning before.

Adding the residual disability rider to your policy will cause your monthly insurance premiums to go up, but it is well worth the cost

The truth is, you may never suffer a debilitating disability that prevents you from working at all. There’s a much greater chance that you will suffer an illness or injury at some point that limits the type of work you do and how often you do it. With the residual rider, you have a better chance of receiving partial disability benefits than you do of collecting on the full amount.

And now that you have a good understanding of what the residual rider is all about, let’s take it one step further:

Some insurance companies offer a basic residual rider and an enhanced residual rider.

What’s the Difference Between a Basic Residual Disability Rider and an Enhanced Residual Disability Rider?

For starters, the enhanced rider will cost you more. But it offers additional benefits as well.

With an enhanced policy, you may be able to collect a higher monthly dollar amount. For example, an enhanced policy may offer a longer residual benefit period or may offer you 50% of your monthly benefit for the first year or so.

In comparison, a basic residual rider may only offer a 50% benefit for six months.

We started this post by saying that insurance policies are a complicated business. But now that you have a good jumping-off point, you’ll at least know which questions to ask and what to look for when comparing policies.

As a physician, it’s always best to consult with a financial planner that specializes in working with other medical professionals. Physician-specific financial advisors know the ins and outs of all of these policies, riders, and plans.

Conclusion

Disability insurance is essential income protection for physicians. We do understand it is a financial commitment. One that we bear ourselves.

In a perfect world, you’d never have to file a claim for disability income benefits. Even if you never did file a claim, you’d be much better off paying the insurance premiums compared to not having any protection and then suffering income loss for one year alone. That one year of income loss could easily put you back way more than what you would have paid for insurance cumulatively.

While there is a chance that you’ll never become disabled in a way that qualifies for full disability, what can you do to make sure you are still protected but can not collect for total disability?

Adding a residual disability rider creates an extra layer of protection that is much easier to collect on. If an injury or illness prevents you from doing some of your duties or causes you to work fewer hours, you’ll still be able to recover some of your pre-disability income.

Before you sign on to a new disability insurance policy, ask your provider if a residual benefit is included. If it’s not, ask if you can add it as an option.

It will cost you more each month, but it’s a small price to pay — especially if you’re trying to protect your financial future.

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