The Surgeon Who Still Operates Three Days a Week
Dr. Okafor, a 44-year-old oral surgeon, earns $26,000 a month from her practice. She owns an individual noncancelable disability policy with a $7,000 monthly benefit, a 90-day elimination period, a 5-year benefit period, an own-occupation definition, and a residual disability rider (a 20% loss threshold, with benefits proportional to lost income). She also has a group long-term disability plan through her professional corporation: 60% of covered payroll, 90-day elimination, any-occupation after 24 months, $10,000 monthly cap; the corporation pays 100% of the premium and does not include it in her W-2. In March she lacerates a tendon, is restricted to three days of surgery a week, works 55% of her prior hours, and earns $14,000 a month.
1. At the end of the 90-day elimination period, what does each policy pay, and how did you get there?
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Individual policy - residual, not total disability. She is still operating, so she does not meet a total-disability test. The residual rider responds to loss of income: her income fell from $26,000 to $14,000, a 46% loss. Benefit ≈ 46% × $7,000 = $3,220 per month (prorated to the exact loss percentage in the policy). The 20% threshold is met. The own-occupation definition and noncancelable status matter here: they lock the definition and premium, so the insurer cannot later argue she should retrain.
Group plan. 60% × $26,000 = $15,600, capped at $10,000 per month. Most group contracts require a 20% earnings loss, and she exceeds it, so partial benefits are payable - often calculated as the plan percentage of lost earnings rather than of total earnings, so read the schedule rather than assuming $10,000.
Duration. The individual policy pays for up to five years. The group plan changes definitions at 24 months, which is the risk to flag now, not later.
2. How are the two benefit streams taxed, and what premium-design change would alter that?
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Individual policy: tax-free. She paid the premiums with her own after-tax dollars, and disability income premiums are not deductible for an individual - they are not medical care. Benefits follow the premiums, so the residual benefit arrives tax-free.
Group plan: taxable. The corporation paid 100% of the premium, deducted it, and did not include it in her W-2. Under the employer-paid rule, the benefits are ordinary income to her. Reportable on a W-2; typically no withholding unless she elected it, so she should plan for the tax bill quarterly.
The design lever. If the PC included the premium amount in her W-2 income as additional compensation, the premiums would be taxed to her and the benefits would become tax-free. The corporation's deduction is unchanged. Whether that trade is worth it depends on her bracket versus the expected benefit - but it must be decided before the disability, not after.
Related caution. Any portion of the individual premium she deducted as a self-employed health insurance deduction should be examined; the tax-free character of the benefit depends on premiums being paid with after-tax dollars.
3. Can she collect from both policies, and what happens to the group benefit at month 25?
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Collection. Yes. A noncancelable individual policy without an other-income offset rider pays regardless of group coverage. Group plans do offset other income, but the offsets typically target Social Security, workers' compensation, and other group plans - individually purchased disability income is usually excluded. Combined income: about $13,220 against a $12,000 income loss, so she is modestly overinsured in total indemnity; that is a design issue to revisit, not a reason either carrier can deny.
Month 25 is the cliff. The group plan changes from own-occupation to any-occupation after 24 months. If she can no longer operate but could teach, administer, or review charts, the group carrier can terminate benefits - even though she cannot return to her specialty. Her individual policy with the own-occupation definition keeps paying on its own terms, but only for the stated five-year benefit period.
Action items. Confirm the group plan's exact definition language and its offset list, file for Social Security disability if the impairment is expected to last 12 months or more, and check whether the laceration was work-related, because workers' compensation would trigger the group offset while leaving the individual policy untouched.