How the policy defines disability is a critical element of the coverage. Whether an individual policyholder will receive benefit payments is closely linked to this definition. Generally, disability income policies define disability in three ways: total disability, partial disability, and residual disability.
Total disability – The broadest definition of total disability is centered on the concept of the insured’s own occupation. This is the best definition of disability from the policyholder’s point of view. Under this definition of disability, insured policyholders will qualify for disability income payments if they are unable to perform the major functions of their own regular occupation. In other words, if a surgeon is unable to perform surgery, the insurer will consider her disabled for purposes of this type of definition. As mentioned earlier in this chapter, this inability to perform the duties of one’s occupation may arise as the result of either an injury or an illness.
Technically, an insured individual with this definition of disability could become disabled and unable to work in his own occupation, begin collecting disability benefits, return to work in another field, and still continue to collect disability benefits. In response to this possibility, some policies use a modified own-occupation definition of disability. This modified definition generally provides that insureds who become disabled and cannot work in their own occupation will receive benefits unless those individuals decide (and are able) to return to employment in another occupation.
Still other policies use a definition of total disability that changes over time. Basically this approach provides that the insurer will apply the own-occupation rule for the first few policy years that the insureds cannot work in their own occupation. Then, after this relatively short time period (two years or so, typically), the insureds will continue to receive benefits only if they are still unable to work in any occupation for which they are suited by education and training. Thus, if the surgeon mentioned above, could work in a research setting or a teaching setting, she might not qualify to continue receiving disability income benefits.
Partial disability – Partial disabilities are those in which the insured individuals cannot perform some of the duties of their own occupation, but can perform other duties of their own occupation. After a period of total disability–when the insureds can return to work and perform some of their duties–their policies will pay a partial disability income benefit such as 50 percent of their total disability benefit payment.
Residual disability – Some disability income policies will pay a benefit for a residual disability. These policies provide benefits based on how much income an individual has lost. Some policies simply require a loss of earnings as the result of a disability caused either by an accident or an illness. Others may require a prior period of total disability.
A second type of residual disability provision comes into play in a situation where individuals are first totally disabled and then recover to the point where they can resume work but not at the same income level as before the disability. The residual disability benefit will pay the difference between the insureds’ pre-disability income and the amount they are able to earn after their disability. This type of benefit is probably most easily understood with an example.
Example. Assume that Mr. Jones earns $8,000 per month before he becomes disabled. After six months, he is able to return to work but earns only $5,000. The residual disability benefit would pay Mr. Jones $3,000 per month, the difference between the $8,000 pre-disability amount and the current monthly income of $5,000.
A policy may pay residual disability benefits on a pro-rata basis according to the percentage of pre-disability earnings lost, or may pay benefits on a sliding scale based on earnings lost. For example, with a pro-rata policy, individuals with a $3,000 monthly disability benefit who lose 60 percent of their pre-disability earnings would receive a $1,800 monthly benefit (60 percent of $3,000). With a sliding scale policy, individuals with a loss of earnings between 20 and 50 percent might receive a 50 percent benefit. With a loss of earnings between 50 and 80 percent, they might receive a pro-rata benefit amount. With lost earnings of greater than 80 percent, they might receive 100 percent of the full disability benefit.
Recurrent disability – This definition of disability addresses when insurers deem a period of disability to have ended. Generally, if insured policyholders have been found to be totally disabled and then their condition improves to the point where they are no longer disabled, this provision says that if a new period of disability begins within (typically) six months of the end of the prior period, the insurer will deem the two periods as being one continuous period of disability. When this is the case, the insured policyholders then do not have to satisfy the elimination period again.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM