An Oral Surgeon, a Residual Rider, and a Group LTD Offset
Dr. Amara Okafor, 52, is an oral surgeon whose practice nets her $240,000 a year, or $20,000 a month. She owns an individual disability policy with an $8,000 monthly benefit, a 90-day elimination period, an own-occupation definition for 24 months that then converts to any-occupation, a residual disability rider with a 20% loss-of-income threshold, and a 3% compound cost-of-living rider; she pays the $4,800 annual premium herself. Her employer's group long-term disability plan, paid for entirely by the employer, covers 60% of her $180,000 base salary with a 180-day elimination period, own-occupation for 24 months, and offsets other disability income dollar for dollar. In February a nerve injury ended her surgical career. She returned in July doing consultations and administration, earning $9,000 a month, and expects to keep that pace indefinitely.
1. Calculate what each policy pays once benefits begin, and explain which policy provision is actually doing the work.
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Individual policy. The 90-day elimination period is satisfied (injury in February, claim running from roughly May). She is not totally disabled - she is working - so the own-occupation versus any-occupation definitions are not the trigger. The residual rider is. Loss of income = ($20,000 - $9,000) / $20,000 = 55%, far above the 20% threshold. Residual benefit = 0.55 x $8,000 = $4,400 a month, with the 3% compound COLA increasing the benefit base over time.
Group LTD. 60% of monthly base salary: $180,000 / 12 = $15,000 x 60% = $9,000. The 180-day elimination means payments start later than the individual policy. The plan offsets other disability income dollar for dollar, so $9,000 - $4,400 = $4,600 a month, subject to the plan's overall cap and any Social Security offset if she later qualifies for SSDI.
Reality check: combined income is $9,000 of work earnings plus $9,000 of benefits, against $20,000 before the injury - about 45% income replacement on the benefit side and a permanent earnings cut she should not paper over.
2. How is each benefit taxed, and what design change would alter that result?
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Individual policy benefit: tax-free. She paid the $4,800 premium with after-tax dollars, so the $4,400 residual benefit is received income-tax free.
Group LTD benefit: fully taxable. The employer paid the entire premium and did not include it in her wages, so the $4,600 is ordinary income (reported on a W-2 as third-party sick pay) and is taxable for Michigan purposes as well. At a combined 24% rate she keeps about $3,500 of it.
Net after tax: roughly $4,400 + $3,500 = $7,900 a month on top of $9,000 of earnings.
Design change: if the employer imputed the group premium as taxable W-2 wages to her, future group benefits would be received tax-free. That is essentially a bet on the probability of disability, and for a 52-year-old surgeon with hand-intensive work the math often favors paying the tax on the premium. The other lever is buying more individual (after-tax) coverage while she is still insurable - the nerve injury closes that door permanently.
3. At month 25 the own-occupation periods expire. What happens to each benefit stream, and why?
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Individual policy: $4,400 continues. The own-occupation definition is irrelevant to a residual claim. The residual rider pays for a loss of income of at least 20% caused by the injury, regardless of whether she can perform other work, as long as she remains under appropriate care and is not earning more than her prior income. She is at 55% loss, so the benefit continues and the COLA keeps raising it.
Group LTD: the $4,600 most likely stops. After 24 months the definition becomes any-occupation, meaning total disability requires inability to perform any occupation for which she is reasonably fitted by education, training, or experience. Earning $9,000 a month in consulting and administration, she is not totally disabled, and the typical group contract has no residual provision - so the benefit ends at month 24.
Resulting picture from month 25: $13,400 a month ($9,000 earnings + $4,400 individual) versus $20,000 before the injury, with the $4,600 group piece gone permanently. That gap, plus the impossibility of new underwriting after the nerve injury, is the argument for maximizing individual coverage with residual and COLA riders before a claim ever happens.