Assume a monthly pre-disability income of $4,750 and an insurance policy providing $3,500. If during the period of residual disability the earnings are $2,250 per month, the policy will pay $921 during the period of residual disability. The calculation is as follows:
1) The loss ratio is $1,250 / $4,750 or 26.32%. The $1,250 in the numerator is calculated as $4,750 of income before disability – $2,250 of income after disability.
2) The $921 residual payout is calculated as the insurance policy amount of $3,500 x 26.32% loss ratio.