Four Types of Disability Benefit Compensation
Disability insurance benefits (payouts, or compensation) are usually based on one of four models. These are important to understand because they will determine the amount of the benefit, which is usually paid monthly.
To put it bluntly, one of these four models will determine the dollar figure of the check you will receive every month for your disability benefit.
Salary Compensation
This is most common with group insurance policies and for those who are not self-employed. This is the easiest model to understand since it is a pure percentage based upon your salary at the time of disability.
So if your salary (paycheck) is $10,000 per month and your policy pays 60% of income, your monthly disability check will be for $6,000. Note that this almost never includes bonuses or other perks.
Productivity Compensation
This is very common for physician coverages as your income will be different month-to-month based on how much work your performed. This is usually measured by number of hours worked, number of patients seen, the amount billed to patients (and their insurances), or the amount collected in billing to patients.
These are usually adjusted by overhead costs and other concerns of the medical practice. While this type of compensation structure can work to the advantage of the physician when it comes time to collect a benefit, it is not always the best. Because of its complexity, it can mean that you will not know your benefit until your first check arrives. Many physicians prefer a net income compensation instead.
Net Income Compensation
This is a much simpler version of compensation and is the self-employed person’s version of salary compensation. The amount is usually based upon income after all expenses (business overhead) or it is based upon the last year’s tax return.
So if your income for the last six months was $120,000 after expenses, your disability benefit would be the percentage of coverage (usually 60-80%) divided by six months. In other words: $120,000 / 6 *0.6 or $12,000 per month.
Formula-Based Compensation
Lastly, we come to formula-based compensation schemes. These are varied and not often used, so we have listed them last. These usually combine things like productivity (above) with referral sources, board certifications, and other factors that might affect your income. These plans are most often used for coverages of careers whose income is heavily reliant on commissions such as sales professionals and tort attorneys.