The Surgeon with a Tremor
Dr. Priya, 54, is an oral surgeon in Anchorage with net practice income of $310,000. She owns an individual disability policy paying $8,000 a month with a 90-day elimination period, an own-occupation definition for 60 months followed by any-occupation to age 65, and a residual disability rider; she pays the premium with after-tax dollars. Her practice also provides long-term disability coverage of 60% of her $180,000 base salary, a 180-day elimination period, own-occupation for 24 months, and benefits offset by other disability income; the practice pays that premium in full. A hand tremor ends her ability to operate. She starts teaching part-time in month four at $120,000 a year, and in month eight she is diagnosed with early-stage Parkinson's disease.
1. Trace her benefit payments month by month through the first year.
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Months 1-3: nothing. The individual policy's 90-day elimination period has not run, and the group plan's 180-day period has barely begun.
Months 4-6: individual policy only. She cannot perform the material duties of oral surgery, so she satisfies the own-occupation test; her teaching income does not defeat an occupational (own-occ) total disability definition, because she is disabled from her own occupation - she need not be unable to work at all. Pays $8,000/month. The residual rider matters only if she returns part-time to dentistry; earnings from a different occupation do not reduce an own-occ total disability benefit unless the policy contains an "own occupation not engaged" clause.
Months 7-12: both plans. Group benefit = 60% × $180,000 ÷ 12 = $9,000/month, offset by other disability income of $8,000, leaving $1,000/month. Her total is approximately $9,000/month, plus any tax effect described below.
2. How are the benefits taxed?
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Individual policy benefits: tax-free. She paid premiums with after-tax dollars, so she has basis in the contract and the $8,000 monthly benefit is excluded from gross income - including the residual benefit later.
Group LTD benefits: taxable as ordinary wages. The practice deducted the premium, so the employee has no basis; benefits are reported to her on a W-2. Her $1,000 monthly group payment is fully taxable.
The result is an after-tax income gap that is larger than the gross numbers suggest: roughly $8,000 tax-free plus about $1,000 taxed at her marginal rate, against a $310,000 pre-disability income. That gap is why individual own-occupation coverage is purchased in addition to group LTD. Note the contrast - had she paid the group premium with after-tax dollars, the group benefit would be tax-free instead.
3. In month 25 the group plan shifts to any-occupation, and in month 61 her individual policy does too. What happens?
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Group plan at month 25: she can no longer claim own-occupation. Because she is demonstrably capable of teaching at $120,000 a year, she does not meet an any-occupation definition that asks whether she can perform the duties of any occupation for which she is reasonably fitted by education, training, and experience. The group benefit likely terminates.
Individual policy at month 61: residual rider becomes the battleground. Under an any-occupation definition she is still not totally disabled, but the residual rider pays a proportional benefit for income loss:
- Loss ratio: ($310,000 − $120,000) ÷ $310,000 = 61.3%
- Monthly benefit: 61.3% × $8,000 ≈ $4,900
Watch the details: the policy may require a 20% minimum loss, a waiting period before residual benefits begin, and a recovery of prior income in the calculation. The group certificate's offset language also controls whether the individual benefit is offset dollar for dollar or only above a threshold.