Disability Insurance: Residual/Partial Disability Riders are Vital for Disability Insurance

By Bill Jackson September 27, 2023 20 mins read 116 Views

By Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF, A 2023 Platinum WCI Medical School Scholarship Sponsor

Disability insurance is an essential tool for physicians to protect their financial future in the event they become too sick or hurt to work due to an accident or sickness. However, not all disability insurance policies are the same, and one crucial factor to consider when purchasing disability insurance is the inclusion of a Residual/Partial Disability Rider.

Disability Insurance: Residual/Partial Disability Riders are Vital for Disability Insurance

A policy with an 0wn occupation definition is arguably the most important aspect of a physician’s disability insurance policy. This makes it possible for you to work in another occupation or medical specialty while still receiving full disability benefits—even if you are earning the same or more income than you were prior to your disability. However, at its very core, it only protects your ability to work in your occupation. At that point, you either are able to work in your occupation or you are not.

A Residual or Partial Disability Rider provides benefits to physicians who can still work in their occupation or medical specialty but are prevented from performing all their duties. A good example might be a surgeon who suffers a hand injury. He or she may still be able to perform some surgical procedures but not at the same volume or complexity as before the injury. A primary care physician who experiences severe migraines may still be able to see patients but may need to reduce their hours or workload. In both cases, a Residual/Partial Disability Rider would provide a benefit to help cover the income lost due to the partial disability. The above examples are commonly referred to as a “loss of duties” or a “loss of time” in the insurance industry.

A Residual or Partial Disability Rider takes away the “all or nothing” associated with own occupation coverage and introduces an income loss component. Typically, a Residual or Partial Disability Rider pays benefits when an insured is working in their occupation but their income has been reduced by 15%-20% or more due to an accident or sickness.

An extension of this is when an insured returns to work on a full-time basis after being totally disabled. While they may be physically recovered and no longer have any restrictions placed upon them, if some or all of their income is tied to productivity or incentive pay, they may continue to experience a loss of income. The same might be true for an aesthetic plastic surgeon who was out of work for 12 months. They return to their practice only to find out that their patients have gone elsewhere, and their referral sources have all but dried up. A Recovery Benefit can aid with an insured’s financial recovery (beware that some policies may not include a Recovery Benefit, or it may only provide benefits for a limited period).

The benefits provided by a Residual/Partial Disability Rider can vary significantly from one insurance company to another. In fact, many policies today offer the choice of several Residual or Partial Disability Riders to “unbundle” their products and provide both the agent and consumer with more flexibility in how a policy is structured. Therefore, it is more important than ever for physicians to carefully review the terms of the rider and understand how benefits are calculated.

What You Might Not Know Before Purchasing Disability Insurance

Recently, I have noticed a disturbing trend among “internet agents.” They are illustrating coverage solely based on price to try to differentiate themselves with one goal in mind—show a lower price to have the potential client select them as their insurance agent. From what I have seen, this is not even a tactic being used to “upsell” the doctor; this is just simply a method to obtain the client—period.

Often, these same insurance agents use spreadsheets to convince you that one policy is better compared to another. However, at no time, is the client ever provided with an illustration of coverage generated by the actual insurance company’s proposal system. Unfortunately, this process may potentially lead you down a decision-making path you might not have taken had you understood what you were purchasing. After all, as someone foreign to the industry, do you even know what questions to ask? All too often, even with significant research, the adage of “you don’t know what you don’t know” may be true.

Remember, a spreadsheet is a tool. Like morphine, it can be extremely beneficial when used appropriately, but in the wrong hands, it can be deadly.

For example, if you are a foreign national (visa holder) in 42 states, you can purchase a policy that states,

“In consideration of the issuance of this policy by Berkshire Life Insurance Company of America, it is hereby understood and agreed that the policy shall not cover loss because of disability contributed to or caused by any sickness or injury incurred while outside of the 50 United States, the District of Columbia, or Canada. including treatment, surgery or complications thereof. This does not apply to incidental travel where the policyholder is out of the 50 United States, the District of Columbia, or Canada for less than 31 days and has made plans to return.”

As a result, if you become disabled in the United States (or outside the United States during incidental travel) and must return to your country of citizenship, benefits will be paid with no restrictions. All other companies will exclude or limit benefits in this situation. I would imagine this information would be invaluable to a foreign national and would greatly impact any decision they might make.

Shockingly, I have never seen this referred to in any spreadsheet I have reviewed. I can make a similar assertation when it comes to the Residual or Partial Disability Rider. The spreadsheet will typically include a row with the name of the insurance company and their logo with no description. It might state something like “Residual Disability Rider — Yes” or possibly “Residual Disability Threshold” and a percentage (15% or 20%) next to it. But does this give the potential insured the information they need to make a proper decision?

In a 2008 letter to Berkshire Hathaway’s shareholders, Warren Buffett wrote, “Long ago, Ben Graham taught me that ‘price is what you pay; value is what you get.'” Other than cost, there are only a few contractual provisions that differ much from one policy to another. If one policy is more expensive but is providing additional benefits you find valuable, you are likely more than willing to pay for them. However, if a policy is more expensive and the additional benefits being provided don’t mean much, if anything, based on your individual needs and goals, you probably would not be willing to pay for them.

Let’s look at the Residual or Partial Disability insurance riders available from the “Big 5.” Please note, this portion is not meant to be read in the form of an article or guest post, it is designed to be used as a reference when reviewing your existing coverage or when you are considering the purchase of a disability insurance policy. However, I have added commentary or bolded and italicized some areas that I felt were important.

More information here:

What Disability Insurance Riders Do Doctors Need to Buy?

Berkshire (Guardian)

Berkshire (Guardian) offers two Partial Disability Insurance Riders.

#1 Basic Partial Disability

Requires income is reduced by at least 20% AND the insured is unable to work as many hours or unable to perform all the same duties they did prior to disability.
Benefits are payable in proportion to loss of income, up to the policy benefit.
If the loss of income is more than 75% of prior income, the loss is considered to be 100% and full benefits are payable.
For the first six months, they will consider the loss of income to be at least 50% if the definition of Partial Disability is met.
Following a period of disability, a Recovery Benefit of up to 12 months for any one claim is payable.

A policy with a Basic Partial Disability Benefit Rider is most suitable for individuals whose compensation is primarily salary and whose job type is not conducive to returning to work part-time (often the case with W-2 employees). In my opinion, this rider is not suitable for a physician or other professional who earns some or all of their income based on productivity (RVUs, wRVUs, Total Time Units for anesthesia, etc.). In fact, a limitation in this area may be financially devastating.

#2 Enhanced Partial Disability

This rider provides benefits when, solely due to sickness or injury, the insured suffers a loss of income of 15% or more.
Benefits are payable in proportion to loss of income, up to the policy benefit.
If the loss of income is more than 75% of prior income, the loss is considered to be 100% and full benefits are payable.
For the first 12 months, the benefit is equal to the actual loss of income, up to 100% of your monthly benefit, with a minimum benefit of 50% of your monthly benefit.
Even after the insured is fully recovered and returns to work full time, benefits continue to be paid if there is a loss of income of at least 15% compared to the insured’s prior income and the loss is solely the result of the injury or illness that caused the disability.
Premium payments continue to be waived for six months after recovery and benefits end.

MassMutual

#1 Extended Partial Disability

For the first six months of a partial disability, whether during the waiting period or after, you are partially disabled if due to sickness or injury you:

- Are working in your occupation or another occupation.
- Are under a doctor’s care.
- Meet the conditions described in either (1), (2), or (3) below:
  - 1. You can do some, but not all, of the main duties of your occupation. The main duty(ies) that you are unable to perform must account for at least 15% of the time you spent in your occupation just prior to the start of the disability.
  - 2. You can perform all the main duties of your occupation, but for no more than 85% of the time they were collectively performed consistently just prior to the start of the disability.
  - 3. You have a reduced capacity to perform your occupation, have a loss of income of at least 15%, and can show a demonstrated relationship between your loss of income and your disability.

disability insurance residual rider

After the first six months of a partial disability, whether during the waiting period or after, you are partially disabled if, due to sickness or injury you:

Are working in your occupation or another occupation.
Are under a doctor’s care.
Have a reduced capacity to perform your occupation.
Have a loss of income of at least 15%, and
Can show a demonstrated relationship between your loss of income and your disability.

During the first six months of partial disability, the total disability benefit is paid for any portion of that six-month period that is not used to satisfy the waiting period if you are working less than 20% of the time worked just prior to the start of the disability.

Otherwise, for the first 12 months of partial disability benefits, after the waiting period, it will pay benefits as follows:

Any monthly payment for partial disability will be at least 50% of the Extended Partial Disability Monthly Benefit;
If your loss of income is more than 50% of the Extended Partial Disability Monthly Benefit, the monthly payment will be your actual loss of income, up to the Extended Partial Disability Monthly Benefit; or
If your loss of income is greater than 75% of pre-disability income, the monthly payment will be the full Extended Partial Disability Monthly Benefit.
Starting with the 13th month of partial disability benefits, monthly benefits will be based on your loss of income relative to pre-disability income.

Berkshire and MassMutual's policies have the most comprehensive Residual/Partial Disability Rider as they replace dollars lost for the first 12 months of a Residual/Partial Disability claim (and not just a percentage of lost income like the other carriers).

Let’s assume a physician has a prior monthly income of $20,000 and a monthly disability benefit of $10,000. Due to an injury or sickness, initially, they must work half of their previous hours and now earn $10,000 per month. As a result, the doctor has lost 50% of their income or $10,000.

Berkshire and MassMutual’s policies will pay the lesser of the dollars lost or the policy’s monthly benefit. Since the monthly benefit is $10,000 and the loss of income is $10,000 per month, $10,000 per month is payable. Assuming things remain the same for 12 months after the policy’s elimination period (the number of days one must be totally or partially disabled before benefits are payable), $120,000 would be paid for the first 12 months of this Residual/Partial Disability ($10,000 month x 12 months).

Principal’s policy, for example, would only pay $60,000 over the same period (50% of $10,000 per month) or $5,000 per month x 12 months. One cannot argue that in the scenario above, Berkshire’s policy with an Enhanced Partial Disability Benefit and MassMutual’s Extended Partial Disability Benefit would pay a larger monthly benefit. However, the cost difference, if any, between them compared to other policies would need to be taken into consideration along with any other provisions that may potentially be more favorable.

More information here:

Applying for Disability Insurance with Pre-Existing Conditions

Standard

The Standard’s Platinum Advantage income protection insurance offers three choices of Residual Disability Riders: Basic, Enhanced, and Short-Term. I will only compare the differences between the Basic and Enhanced Residual Disability Riders.

#1 Basic Residual Disability

This rider offers disability benefits proportionate to the loss of income when the insured has a loss of income of at least 20% AND a loss of either time or duties.
The benefit will be at least 50% of the basic monthly benefit for the six months that a benefit is payable.
A Recovery Benefit provides continued benefit payments if the insured returns to the same occupation and continues to have a loss of earnings of at least 20% due solely to the disability he or she has just recovered from.

#2 Enhanced Residual Disability

This option provides benefits proportionate to the loss of income, but no less than 50% of the basic monthly benefit for the first 12 months.
The insured must show a loss of time OR duties OR income during the benefit waiting period, which makes it perfect for insureds who might not experience an immediate loss in income.
After the benefit waiting period, the insured is considered disabled if they are working in their regular occupation or any other occupation and they experience a loss of income of at least 20%.
Professionals in specialized work may benefit from a Recovery Benefit, which provides benefits if the insured returns to work in their regular occupation or another occupation but continues to have a loss of earnings (at least 20%) due solely to the previous disability.

Ameritas Cornerstone

This is currently available in all states except California, Florida, Montana, North Dakota, New York, South Carolina, South Dakota, and Wyoming.

#1 Basic Residual Disability

The ultimate cost-savings option that still provides coverage during a residual disability.
20% income loss requirement.
Caps the maximum monthly residual benefit at 50% of the base monthly benefit.
NO RECOVERY BENEFIT.

Lately, I have seen this option being illustrated for physicians and other professionals. It is extremely limited in how it pays. In my opinion, this rider is not suitable. In fact, a limitation in this area may be financially devastating.

#2 Enhanced Residual Disability

20% income loss requirement.
The full base monthly benefit is payable if loss of income reaches 80%.
Built-in Recovery Benefit continues to pay a Residual Benefit for up to THREE ADDITIONAL MONTHS if you recover and return to your occupation on a full-time basis but continue to experience a loss of income directly due to your previous disability.

Ironically, in the prior policy series (DInamic Foundation—also discussed below), the most comprehensive Residual Disability Rider was the Enhanced Residual Disability Rider. However, for those agents who might not have read the specimen policy or who are unfamiliar with the new policy series, this is no longer the case. The Enhanced Plus Residual Disability Rider is the most comprehensive.

#3 Enhanced Plus Residual Disability

15% income loss requirement.
During the elimination period, the loss of income requirement is waived.
Return to work incentive, up to 100% income replacement for the first three months, not to exceed the base monthly benefit.
Guaranteed minimum of 50% of the base monthly benefit for the first six months of payments.
The full base monthly benefit is payable if the loss of income reaches 75%.
Built-in Recovery Benefit continues to pay a Residual Benefit up to the maximum benefit period if an insured recovers and returns to their occupation on a full-time basis but continues to experience a loss of income directly due to their previous disability. This benefit terminates if an insured does not qualify for a Residual Disability Benefit for two consecutive or three non-consecutive months.

More information here:

Disability Insurance: Your Health Is Your Wealth

Ameritas DInamic Foundation

This is currently only available in California, Florida, Montana, North Dakota, New York, South Carolina, South Dakota, and Wyoming.

#1 Basic Residual Disability

The Basic Residual Disability Rider is designed to supplement income when an insured is Residually Disabled as defined in the policy.

The residual monthly benefit will be the LESSER of:

50% of the base monthly benefit; or
The base monthly benefit for total disability multiplied by the ratio of the insured’s loss of earnings during disability to the monthly earnings before disability.
15% loss of income requirement.
Loss of monthly earnings is the result, directly and apart from any other cause, of an injury or sickness as defined in the policy; and
An insured can perform one or more, but not all, of the material and substantial duties of their occupation; or they are unable to work in their occupation for 80% or more of the time as was usual prior to the start of disability.
NO RECOVERY BENEFIT.

#2 Enhanced Residual Disability

20% income loss requirement.
The full base monthly benefit is payable if loss of income reaches 80%.
Built-in Recovery Benefit continues to pay a Residual Benefit for up to THREE additional months if you recover and return to your occupation on a full-time basis but continue to experience a loss of income directly due to your previous disability.

Principal Income Protector

This is currently available in all states except California, Florida, Montana, North Dakota, New York, South Carolina, South Dakota, and Wyoming.

Principal’s HH750 (700 Series) and Income Protector (800 Series) offer two Residual Disability Riders—Short-Term Residual Disability Benefit (STRDB) and Residual Disability and Recovery. I will only provide an overview of the Residual Disability and Recovery Benefit as physicians should only consider this rider.

#1 Residual Disability and Recovery Benefit Rider

Residual Disability means that during the elimination period:

- You are not totally disabled; and
- You are working in your own occupation or another occupation; and
- Solely due to injury or sickness:
  - You are able to perform some, but not all, of the substantial and material duties of your own occupation; OR
  - You are unable to work full-time in your own occupation; OR
  - You have a loss of earnings greater than or equal to 15%.

After the elimination period, Residual Disability means:

- You are not totally disabled; and
- You are working in your own occupation or another occupation; and
- Solely due to injury or sickness, you have a loss of earnings equal to or greater than 15% and ONE of the following apply:
  - You are able to perform some, but not all, of the substantial and material duties of your own occupation; OR
  - You are unable to work full-time in your own occupation; OR
  - You satisfy the requirements of the claim information section of the policy.

For Residual Disability:

A minimum of 50% of the maximum monthly benefit will be paid for the first 12 months of a Residual Disability.
100% of the maximum monthly benefit is paid if the percentage of earnings lost exceeds 75%.

Recovery Benefits are payable if:

You are no longer disabled; and
You return to work immediately after a continuous disability for which benefits were payable under the disability benefit section; and
You have a Recovery loss of earnings equal to or greater than 20% of your recovery prior earnings, and it can be validated that your recovery loss of earnings is directly and solely due to the prior injury or sickness that caused the disability.
Recovery Benefits will end when the insured no longer has a recovery loss of earnings greater than 20% for any two consecutive months.

More information here:

A Pain in the Butt – My Dental Disability Story

Principal HH750

This is currently only available in California, Florida, Montana, North Dakota, New York, South Carolina, South Dakota, and Wyoming.

#1 Residual Disability and Recovery Benefit Rider

Residual Disability means:

- You are not totally disabled; and
- Solely due to injury or sickness you have a loss of earnings equal to or greater than 20% of your prior monthly earnings and;
- You are able to perform some, but not all, of the substantial and material duties of your own occupation or you are unable to work full-time in your own occupation; OR
- You are working in another occupation; and
  - You satisfy the requirements of the claim information section of the policy.
  - 100% of the maximum monthly benefit is paid if the percentage of earnings lost exceeds 75%.
  - A minimum of 50% of the maximum monthly benefit will be paid for the first six months of a Residual Disability.

Recovery Benefits are payable if:

You are no longer disabled; and
You return to work immediately after a continuous disability for which benefits were payable under the disability benefit section; and
You have a recovery loss of earnings equal to or greater than 20% of your recovery prior earnings, and it can be validated that your recovery loss of earnings is directly and solely due to the prior injury or sickness that caused the disability.
Recovery benefits will end when the insured no longer has a recovery loss of earnings greater than 20% for any two consecutive months.

Pre-disability income is also something that should be taken into consideration when purchasing a disability insurance policy. While this will likely not impact your buying decision, it provides you with detail as to how pre-disability income is calculated and may include:

- Pre-Disability Income: the greatest of the average monthly income earned and received for the:
  - Last 12 months before the start of disability;
  - Last 24 months before the start of disability;
  - Highest consecutive 24 months during the 60 months prior to disability.

- Prior Monthly Earnings: Means the greater of the average monthly earnings received by you during:
  - Any two of the past three full tax years just prior to the onset date of disability; or
  - The 12 calendar months just prior to the onset date of disability

Prior Earnings: Your monthly average earnings during the two consecutive calendar years with the highest earnings in the three calendar years prior to the claimed date of disability
Prior Earnings: Your highest monthly average earnings for any consecutive 12 months in the last 24 months before a continuous disability began.

Predisability Earnings means the greater of:

Your highest average earnings for any consecutive 12 months in the last 24 months before the date of your disability or your family member’s serious health condition began; or
Your earnings for any two full tax years within the three full tax years preceding the date of your disability or your family member’s serious health condition began, divided by 24.

Prior Income means your average monthly income for either the last 24 calendar months just prior to the date on which you became disabled, or for the two calendar years with the highest earnings in the three calendar years just prior to the date on which you became disabled, whichever is greater.

In conclusion, a Residual or Partial Disability Rider is a critical component of disability insurance for physicians. It provides essential protection for those who may still be able to work but who are unable to earn their full income due to a partial disability. However, physicians must carefully review the terms of the rider and understand how the benefits are calculated and under what circumstances they can make a claim. By doing so, they can ensure that they have the best possible protection for their financial future in case of a disability.

Lawrence B. Keller, CLU, ChFC, CFP® is the founder of Physician Financial Services, a New York-based firm specializing in income protection and wealth accumulation strategies for physicians. He can be reached at (516) 677-6211 or by email to [email protected] with comments or questions.

These are the personal views of the author and may not represent the views and opinions of The Guardian Life Insurance Company of America or its subsidiaries or affiliates thereof.

Individual disability income products underwritten and issued by Berkshire Life Insurance Company of America (BLICOA), Pittsfield, MA. BLICOA is a wholly owned stock subsidiary of The Guardian Life Insurance Company of America (Guardian), New York, NY. Product provisions and availability may vary by state. Optional riders are available for an additional premium. Some policy benefits and features are not available to all occupations.

Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 355 Lexington Avenue, 9th Floor, New York, NY 10017, 212-541-8800. Securities products and advisory services are offered through PAS, member FINRA, SIPC. Financial Representative, The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. Physician Financial Services is not an affiliate or subsidiary of PAS or Guardian. AR Insurance License #1057229, CA Insurance License #0C37340.

PAS is a member FINRA, SIPC

2023-160601 Exp. 08/2025

[Editor's Note: Many thanks to Larry Keller of Physician Financial Services, one of our Platinum Level (contributing $8,000+) Sponsors, and his long-time relationship with WCI supporting the scholarship and helping physicians secure the best DI policies for their unique needs. This is the third of our three scholarship-sponsored posts for 2023. Larry is a long-time advertiser and is on our list of Recommended Insurance Agents, and he's been helping physicians with their DI needs since 1990. Physician Financial Services is a New York-based firm specializing in income protection and wealth accumulation strategies for physicians. Larry can be reached at (516) 677-6211 or by email at [email protected] with comments or questions. Thank you for supporting those who support this site and especially the scholarship. All proceeds go to the scholarship winners.]

The post Disability Insurance: The Vital Role of the Residual/Partial Disability Rider appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

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By: Josh Katzowitz
Title: Disability Insurance: The Vital Role of the Residual/Partial Disability Rider
Sourced From: www.whitecoatinvestor.com/disability-insurance-residual-partial-disability-rider/
Published Date: Wed, 27 Sep 2023 06:30:29 +0000

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