Understanding Residual Disability Benefits: Are They Worth The Cost?
Part 3 – Current Monthly Income
In our previous posts, we identified the basic formula disability insurers use to calculate residual (partial) disability benefits and discussed variations in how disability insurers calculate Prior Monthly Income. Now, we will examine the other principal component in calculating a residual disability benefit: Current Monthly Income.
Current Monthly Income is the calculation of how much a doctor is earning now, versus how much he was earning prior to his disability. Although this sounds like a simple concept, calculating Current Monthly Income can be challenging in the healthcare industry. Many physicians and dentists own their own practices or are a partner in a practice group. Their income is not only based on their productivity, but also includes a passive component from the other business activities of the practice. For example, a dentist may employ one or more hygienists or associate dentists who generate additional revenue. When a doctor becomes disabled, the practice revenue may remain relatively constant as associates increase their production to account for the doctor’s reduced schedule.
Some insurers take advantage of this by calculating Current Monthly Income not on the doctor’s production, but rather on the practice’s revenue. This fails to take into account the true financial impact of a disability because, while revenue may remain high, expenses increase as associate doctors and hygienists work more (and earn more) to fill in for the disabled doctor.
Additionally, many doctors pay themselves based on a percentage of their own production, in addition to the income they earn as practice owners. When a doctor becomes partially disabled, his income from working in the practice will drop, even if the practice’s overall profitability does not. Depending on the language in a particular disability insurance policy, the policy may not take into account the drop in production, and the doctor may not be able to recover the full loss caused by his disability.
Doctors may also encounter difficulty if they seek to replace their lost income by working in another occupation. Although many disability policies are advertised as being “own-occupation” policies, that definition may only apply in cases of total disability. Many residual disability benefits will include income made in other occupations as part of the Current Monthly Income, and reduce benefits accordingly. For example, consider the following definitions of Current Monthly Income, taken from two different policies:
Policy 1: Current Monthly Income means your Monthly Income in your occupation for each month of Residual Disability being claimed.
Policy 2: Current income means all income which you receive on a cash basis in each month while you are residually disabled.
Under Policy 1, income earned in another occupation should not be considered current monthly income, and should not reduce the amount of the residual disability benefit. However, under Policy 2, all income is included within the definition of current income, regardless of the source, so working in another occupation while residually disabled can reduce, or even eliminate, the residual disability benefit.
In our next post in this series, we will look at some of the practical challenges that exist with residual claims and provide additional information to help doctors evaluate whether residual disability benefits are worth the cost. However, knowing how current monthly income is calculated in your disability policy is an important component of understanding your disability coverage.