Residual profit

The residual benefit is the economic benefit that an insurance company undertakes to deliver to its insured in the event of suffering a disability. The goal is to make up the difference between your previous and present income due to this circumstance.

Residual profit

As we well know, there are many insurance policies that have been created to protect the insured from certain circumstances. The compensation they offer can be monetary or non-monetary. For example, when a medical insurance is contracted, the policy contemplates that the insured will receive medical assistance without making any disbursement.

In this article, we explain what residual profit is. This concept is closely related to insurance policies that aim to guarantee a worker’s income in the event of a disability.

In this way, if the insured person suffers a disability and cannot receive the remuneration prior to this new circumstance, the insurance company will compensate him the corresponding part. This payment to the insured is made whether the disability is total or partial, allowing the latter to work a reduced day.

How is the residual profit calculated?

To calculate the residual benefit it is necessary to know what are the normal benefits under which the policy has been contracted. These normal benefits are the income that the insured wants to guarantee in case of disability.

With this information, when the insured suffers a disability, it is considered in the first instance whether it is a total or partial disability.

  • In the case of being total, you will receive the total of the normal benefits.
  • On the contrary, if it is partial, the loss of income that has occurred with this new circumstance will be calculated as a percentage. This percentage will be used to multiply it by the normal benefits and obtain the amount that will be given to the insured.

Residual profit example

Let’s imagine that we are workers in a watch company where we charge $ 2,000 per month. This company gives all its staff a disability insurance so that if any worker suffers a mishap, they can maintain their income.

After suffering a traffic accident, we are diagnosed with a temporary disability of 25%. For this reason, we suffer very intense pain when we make prolonged efforts. We inform our company of this circumstance and it grants us a reduction of the working day.

Our salary will be reduced from $ 2,000 to $ 1,000. We go to our insurer to inform them of this situation and to compensate us for this loss of income. The variation has been 50% so the insurer will pay us $ 2,000 x 0.5 = $ 1,000 of residual benefit.

Another meaning: residual investment profit

Although it is not widely used in the investment world, the term residual profit refers to the following: it is the difference between the profit obtained by making an investment and the return that the money invested would have given at an interest rate determined.

Suppose we have made an investment in a company of $ 10,000 with a return of $ 12,500. Establishing an interest rate of 4% for our calculation, we carry out the following formula:

Residual profit = 2,500 – (10,000 x 0.03) = $ 2,200

The residual profit obtained on this investment would be $ 2,200.