Two Disability Policies, One Back Injury
Priya, 41, is a regional sales manager earning $9,500 a month in base salary plus about $2,000 a month in commissions. Her employer pays the full premium on a group long-term disability plan: 60% of base salary, 90-day elimination period, own-occupation for 24 months then any-occupation, with benefits offset by Social Security and workers' compensation. Two years ago she also bought a noncancelable individual policy paying $2,500 a month after 90 days, own-occupation to age 65, paid with her own after-tax dollars; it has no residual or COLA rider. In April she injures her back and cannot travel or lift. Social Security denies her first application but approves her on appeal 11 months later, with benefits of $1,900 a month retroactive to month six.
1. Estimate Priya's monthly income during the first year of total disability, explain each offset, and say which dollars are taxable.
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Group LTD: 60% of base salary = 0.60 × $9,500 = $5,700 per month. Commissions are usually excluded unless the plan's definition of earnings includes them - a document worth checking, since her commissions are real income.
Offset: Social Security of $1,900 is subtracted dollar for dollar once it begins, so the group plan pays $3,800. Workers' compensation is zero here.
Individual policy: $2,500, and it is not offset by the group plan. Group contracts typically offset only listed "other income benefits" - Social Security, workers' comp, and sometimes other group disability - not individually owned policies. The plan document controls.
Total ≈ $6,300 per month.
Taxation: the employer paid the group premium, so the $3,800 group benefit is taxable (reported on a W-2). She paid the individual premium with after-tax dollars, so the $2,500 is tax-free. This is a strong argument for the individual policy even at a lower benefit.
The trap: for months six through eleven the group plan paid the unreduced $5,700. When Social Security approved retroactively, roughly $11,400 of group benefit became an overpayment that the plan will recover. She should be told to set that money aside rather than spend it.
2. In month eight she returns part-time to a desk job paying $2,800 a month. What happens to each benefit?
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Individual policy: likely stops. She has no residual (partial) disability rider and no COLA. Under a standard own-occupation contract without a residual provision, benefits typically end when the insured returns to work in any capacity, even at reduced pay, because the contract pays for total disability. The governing language is the definition of total disability and any part-time-work provision - some contracts continue benefits if earnings stay below a stated percentage, but she cannot assume it here. This is the single biggest gap in her coverage: a residual rider is what pays the difference when someone works part-time while recovering.
Group plan: probably continues in some form. Because the plan is own-occupation for the first 24 months and her own occupation requires travel and lifting, she can still satisfy the definition while at the desk. Many group contracts then pay a partial or work-incentive benefit - frequently 50% of the scheduled benefit plus 50% of earnings, with a cap so combined income never exceeds 100% of pre-disability earnings.
She should request the plan's partial-disability provision in writing and coordinate the two claims rather than letting either lapse.
3. At month 24 the group plan switches to any-occupation. She is still at the desk job earning $2,800, and the insurer determines she could earn $5,000 in a sedentary role. Analyze both contracts.
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Group contract: the any-occupation test asks whether she can perform the duties of any occupation for which she is reasonably fitted by education, training, or experience - usually paired with an earnings test (commonly whether expected earnings reach roughly 60–80% of indexed pre-disability earnings). Her pre-disability earnings were about $11,500 a month. Even $5,000 is only about 43% of that, so under a 60% earnings test she would likely still be considered disabled and continue receiving a partial benefit. If the insurer's vocational analysis puts her capacity at $7,500 (about 65%), the benefit ends. The outcome therefore hinges on the earnings test in the plan document and on the occupational assessment - not on the label "any occupation."
Individual contract: unaffected by the group insurer's determination. It remains own-occupation to age 65, so as long as she cannot perform the material duties of her own sales role, the coverage is there - and it is noncancelable, so the premium and provisions cannot be changed.
Takeaway: the individual policy is the durable protection; the group plan is income that can evaporate on the insurer's vocational judgment. The riders she declined - residual and COLA - are precisely the ones that would have covered this gap.