A Surgeon's Own-Occupation Policy Meets the Hospital's Group LTD
Dr. Patel, 41, is an orthopedic surgeon earning $25,000 a month at a Richmond hospital. She owns an individual disability policy: $12,000 a month benefit, 90-day elimination period, own-occupation definition for five years, and a residual benefit that pays proportionally when income loss exceeds 20%. The hospital also provides group long-term disability: 60% of base pay, 180-day elimination period, any-occupation after 24 months, offset by other income benefits including individual disability benefits. The hospital pays the full premium. After a hand injury she stops operating but begins consulting part-time, earning $9,000 a month. She asks what her policies will pay and whether the group plan will cut her off.
1. Compute the monthly benefits under both policies and explain the offsets.
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Individual policy (residual benefit): income loss = $25,000 − $9,000 = $16,000, a 64% loss. Her policy pays proportionally: 64% × $12,000 = $7,680 a month. The 20% threshold is easily met, and the five-year own-occupation period means she is disabled under the contract because she cannot perform the material duties of orthopedic surgery - the consulting income does not defeat the claim during that window, though she must check whether the residual provision requires she be under a physician's care and not engaged in a gainful occupation inconsistent with the policy terms.
Group LTD: 60% of $25,000 = $15,000 gross. Other income benefits - including her $7,680 individual benefit - are offset: $15,000 − $7,680 = $7,320 a month.
Combined: $15,000 a month, about 60% of her pre-disability income. That is not a coincidence - the group cap determines the total, and her individual policy's main financial value is that it fills the group plan's gaps (the 90 vs. 180-day elimination period, the tax treatment, and the any-occupation cutoff) rather than adding on top of the group maximum.
2. Why might the group plan terminate benefits in year three while the individual policy keeps paying?
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Because the definitions diverge, and she is doing exactly the kind of work that exposes the difference.
- Group plan: after 24 months it switches to any-occupation - disability is measured against any occupation for which she is reasonably suited by education, training, and experience. A part-time consulting arrangement at $9,000 a month will look like exactly that. At the 24-month mark the carrier will re-evaluate and can terminate benefits.
- Individual policy: own-occupation for five years. For roughly three more years after the group plan stops, she remains disabled under the individual contract because she cannot perform the material duties of orthopedic surgery.
Practical consequences she must plan for:
- Income drops from about $15,000 to $7,680 a month at month 25. That is the cliff to model now, not later.
- The group plan's appeal process should be started the moment a termination letter arrives; the carrier bears the burden of showing she can perform an occupation.
- She should confirm her individual policy's residual provision remains payable if she increases her consulting hours and income - at higher earnings the proportional benefit shrinks toward zero.
- This is the argument for a future purchase option or additional individual coverage while she is still insurable and young; the group plan was never designed to carry a surgeon.
3. How is each benefit taxed, and how does that change the picture?
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Individual policy: tax-free. She paid the premiums with after-tax dollars, so the $7,680 a month is received income-tax free.
Group LTD: taxable. The hospital pays the full premium and does not include it in her income, so the $7,320 falls under the employer-paid exception and is ordinary taxable income. It is also subject to FICA in most arrangements.
Net replacement ratio. Assume a combined marginal rate of roughly 32% (federal plus Virginia):
- Group: $7,320 × 0.68 ≈ $4,978 net
- Individual: $7,680 net
- Total: about $12,658 against $25,000 of gross earnings - roughly 51%, not 60%.
Two consequences:
- Her actual income replacement is materially lower than the illustration suggests, which argues for higher individual coverage now, while she is 41 and healthy.
- If the hospital were to restructure the plan so employees pay the premium with after-tax dollars (a §125 election), the group benefit would become tax-free - but the offset formula would not change, so the group maximum stays $15,000. The gain comes from the tax side only, and the employer must agree.
She should also check whether her individual policy has a COLA or future purchase option; with three years of the own-occupation window left, adding coverage later may not be possible.