Dr. Ellis's Three Policies and One Bad Disc
Dr. Ellis, 44, is a periodontist who owns an S corporation practice with five employees in Wisconsin and pays himself a $230,000 salary. He carries three policies: (1) an individual disability policy issued in 2019 - $6,000 a month, 90-day elimination, own-occupation for 60 months then any-occupation, $2,400 annual premium paid from his personal checking account; (2) a group long-term disability plan paid entirely by the practice - 60% of base salary capped at $8,000 a month, 90-day elimination, own-occupation for 24 months then any-occupation, offsetting Social Security and other group disability but not individual policies; (3) a practice overhead expense policy - $5,000 a month, 30-day elimination, 12-month benefit period, premiums paid by the practice. In April a cervical disc injury ends his surgical work; he now works 20 hours a week doing exams and consulting, and practice revenue is 45% of normal.
1. Which of the three policies respond, when, and for how much?
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1. Individual disability policy - $6,000/month after the 90-day elimination period. His definition is own-occupation for 60 months. He cannot perform the substantial and material duties of a periodontist because he has stopped doing procedures, so the full benefit is payable even though he works part-time in other duties. The only check is the policy's relation-to-earnings provision, and $72,000 a year against $230,000 of prior income sits comfortably inside any reasonable limit. This benefit is not offset by the group plan or by Social Security.
2. Group LTD - capped at $8,000/month (60% of $230,000 is $11,500, so the cap governs). Two fights ahead: the carrier may argue that 20 hours of exams and consulting is 'working,' and the plan offsets Social Security and other group disability. His individual policy is expressly not offset.
3. Overhead expense policy - $5,000/month after 30 days, for 12 months. It reimburses covered practice expenses, not his income, and generally requires total disability from his occupation to pay in full; many contracts pay a proportionate amount when the practice is still running at 45% of revenue. It does not replace salary.
SSDI is the pivot point. Substantially gainful activity is roughly $1,600/month; he earns about $8,600. He will be denied. If he quit to qualify, the group offset would largely cancel the SSDI against his LTD, so he would surrender $8,600 of earnings to gain $2,000–$2,500 of Social Security. Working part-time plus the individual policy plus a proportionate LTD benefit is the better path - and it also preserves the practice.
2. How is each dollar of benefit taxed, and what planning move is available?
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Individual policy - tax-free. The $2,400 of premiums came from his personal account with after-tax dollars. He cannot deduct them: the self-employed health insurance deduction covers medical insurance, not disability income, and an S corporation employee cannot deduct personal DI premiums either. Tax-free premiums in, tax-free $6,000/month out. That is why this is his most valuable coverage per dollar.
Group LTD - fully taxable. The practice paid and deducted the premium, and no amount was included in his W-2. Benefits are ordinary income when paid, reported on a W-2 from the plan. An $8,000 taxable benefit is worth materially less than $6,000 tax-free.
Overhead expense - taxable. The practice deducted the premiums, so reimbursements are taxable income to the practice (or flow through to him).
Social Security - up to 85% taxable at his income level, if he ever qualifies.
Planning move. If the S corporation pays the premium on his individual disability policy and includes it in his W-2, the corporation deducts it as compensation, he is taxed on the premium, and the benefits become tax-free. That is a legitimate Section 162 bonus arrangement - but it changes the character only of the portion funded that way, so the carrier must be told who pays what, and the change must be made before a claim, not after.
3. What return-to-work and claim-management pitfalls should Dr. Ellis watch over the next 12 months?
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- Elimination periods run concurrently. The individual policy and the group LTD both use 90 days; the overhead policy uses 30. One onset date, three clocks, all starting in April.
- Recurrence provisions. Most contracts treat a relapse within about six months as a continuation of the original claim, with no new elimination period. Keep treatment and income documentation continuous.
- The own-occupation clock. His individual policy pays on his own occupation for 60 months - to 2029. After that it switches to any-occupation, and a 44-year-old periodontist can do many things. That is when the risk starts, which argues for exercising a future increase option and pricing a COLA rider now.
- Residual benefits. If he moves to three days a week and loses 30% of income, a residual rider pays proportionally with no new elimination period. Without the rider, the benefit tends to be all-or-nothing, and a well-meant increase in hours can wipe it out.
- Watch the total. Many group LTD contracts cap combined earnings plus benefit at 100% (or a stated percentage) of pre-disability income. Model the combined number before he adds clinic hours.
- Keep the overhead claim separate. Expense reimbursement and lost income are distinct claims; mixing them in one file invites offsets and delay.