A Surgeon Who Can Still Work, and a Mother Who Cannot Bathe Herself

Months 4 through 27 (the own-occupation period):

Marcus satisfies the elimination period after 90 days of disability. He is totally disabled from his own occupation - vascular surgery - so the policy responds. Because he has some earned income and a residual rider, the benefit is prorated by his income loss:

• Income loss: ($25,000 − $9,000) ÷ $25,000 = 64%
• Residual benefit: 64% × $6,000 = $3,840 per month

(If the policy instead treats him as totally disabled - some own-occupation contracts pay the full benefit when the insured cannot perform the material duties of the own occupation regardless of other earnings - the benefit would be $6,000. Read the residual clause: most require a minimum loss, commonly 20%, which he clears.)

After 24 months: the definition shifts to any occupation for which he is reasonably fitted by education, training, and experience. This is the pivotal question in the case. A hand-injured vascular surgeon earning $9,000 per month as a hospital administrator is very likely not totally disabled under an any-occupation definition. The insurer will argue he can perform the duties of a medical director, administrator, or consultant - and it has his own consulting income as evidence.

Practical result: the residual benefit may continue on a prorated basis if the contract's residual rider survives the definition change and he still has an income loss, but the full and near-full payments likely stop. He should assume the benefit will be reviewed and contested at month 24 and plan accordingly.

Current structure - benefits are tax-free. Marcus paid the premiums with after-tax dollars. Under the general rule, disability benefits are excluded from gross income to the extent the insured paid the premiums. So the $3,840 (or $6,000) is received income-tax free.

SSDI is different. Social Security disability benefits are taxed under the tiered rules for Social Security benefits: up to 50% is includible at moderate income, and up to 85% at higher income. Because Marcus also has substantial earnings ($9,000/month), a large share of the $2,900 will likely be taxable. His tax preparer should run the provisional-income computation.

No offset. This is an individual policy without a Social Security offset rider, so he keeps the full $2,900 plus his policy benefit. Group long-term disability plans, by contrast, almost always offset for SSDI - the exam frequently tests that distinction.

If the professional corporation had paid and deducted the premiums:

• The premiums would not have been taxable income to Marcus.
• The benefits would then be fully taxable as ordinary income when received, because the employer had effectively paid for the coverage with pre-tax dollars.
• The employer could also have structured a bonus arrangement, but any way the employer funds the premium, the tax follows it.

Bottom line: the tax treatment of disability benefits tracks who bore the premium cost. After-tax dollars buy tax-free benefits; deductible employer dollars buy taxable benefits.

Is she eligible? Yes. A tax-qualified LTC policy pays when the insured is certified by a licensed health care practitioner as either (1) unable to perform at least 2 of the 6 activities of daily living - bathing, dressing, eating, toileting, transferring, continence - for an expected period of at least 90 days due to a loss of functional capacity, or (2) requiring substantial supervision to protect herself from threats to health and safety because of severe cognitive impairment. Elaine needs help with three ADLs, so the ADL trigger is satisfied. The certification must be in the file.

Elimination period: 90 calendar days - on a calendar-day contract, the clock starts the day she first needs covered care, not the day she starts paying for it. Confirm the contract's basis, because a "days of service" elimination period would stretch out the wait.

Monthly benefit: $150 per day × 30 = $4,500 per month maximum. Her care costs $5,200, leaving a $700 monthly gap she pays herself.

• If the policy reimburses actual charges, she receives the lesser of charges or $4,500.
• If it is an indemnity contract, she receives the full $4,500 regardless of what she spends.

Taxation: employer- or self-paid LTC premiums are deductible within age-based limits, and benefits are tax-free up to the greater of actual costs incurred or the HIPAA per-diem limit (indexed annually, in the low-$400s per day recently). Her $150/day benefit is far below that ceiling and is also below her actual costs, so it is entirely excludable.

Longer-term point: three years of benefits at $4,500/month is about $162,000. If the policy has inflation protection, confirm whether it is simple or compound - at 3% compound over 14 years, $150/day grows meaningfully; without inflation protection, the benefit's purchasing power has eroded since purchase.