Own-Occupation Dentist With Residual Disability
Dr. Patel, age 45, earns $20,000 per month as a dentist. He owns an individual disability income policy with a $10,000 monthly benefit, a 90-day elimination period, a five-year benefit period, and an own-occupation definition. It includes a residual disability rider that pays proportional to lost income once income loss is at least 20%. Premiums are paid personally. On January 1 he suffers a hand injury and is totally unable to perform dentistry through April 30. Beginning May 1 he works 20 hours per week as a consultant, earning $6,000 per month, and he cannot perform dentistry. His policy is still in force, and he has no other disability coverage.
1. When do benefits begin, and what is payable for April and for May?
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The 90-day elimination period runs from January 1. January 1 through March 31 is 90 days, so benefits begin April 1 (day 91).
- April: Dr. Patel remains totally disabled from his own occupation, so the policy pays the full monthly benefit of $10,000 for April.
- May: He returns to work in another occupation. Under the residual rider, compare prior income to current income:
- Lost income = $20,000 − $6,000 = $14,000
- Percentage loss = $14,000 ÷ $20,000 = 70%
- Residual benefit = 70% × $10,000 = $7,000
Because premiums were paid personally, the benefits are received income-tax-free.
2. How would the answer differ if the definition were any-occupation and premiums were paid by an employer?
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An any-occupation definition would change the May result. Once Dr. Patel can work as a consultant, he may no longer be totally disabled under an any-occ contract, because he can perform another gainful occupation. The total disability benefit would likely stop; a residual rider might still pay based on the 70% income loss, but only if the contract's residual provision applies.
If premiums were employer-paid, benefits would generally be taxable to Dr. Patel to the extent the employer paid the premiums. The $7,000 residual benefit would then be reduced by the tax owed, unlike the tax-free personally paid policy.