The Oral Surgeon With Two Disability Plans That Do Not Stack
Dr. Sarah Lin is a 46-year-old oral surgeon earning $18,000 a month. She owns an individual own-occupation disability policy: $7,000 monthly benefit, 90-day elimination period, benefit period to age 65, residual disability rider, and a provision stating there is no offset for other income. Her employer also provides a group long-term disability plan paid entirely by the employer: 60% of the first $10,000 of monthly salary, 180-day elimination period, any-occupation definition after 24 months, and an other-income offset that expressly includes individual disability benefits. She lacerates a tendon in her dominant hand. She cannot perform surgery but can run the practice, and her income falls to $9,000 a month.
1. Which policy pays during the first 180 days, how much, and under which definition of disability?
Read the worked answer
- Days 1 to 90: neither policy pays. Both elimination periods run from the same date of disability and run concurrently, not one after the other.
- Days 91 to 180: the individual policy pays $7,000 a month. Under an own-occupation definition she is totally disabled if she cannot perform the substantial and material duties of her own occupation. For an oral surgeon the surgical procedures are the core of that occupation; running the practice is administrative work, not the occupation. Absent a 'not working elsewhere' restriction, she qualifies for the full benefit, and the no-offset clause means it is not reduced.
- The group plan still pays nothing until its 180th day.
- After day 181: the group plan computes 60% of $10,000 = $6,000, then subtracts other income, which by its own terms includes the individual disability benefit. $6,000 minus $7,000 leaves $0. The individual policy keeps paying $7,000, because its no-offset promise only runs one direction.
- After 24 months the group test becomes any-occupation. Managing a practice is work she is reasonably fitted for, so she likely fails that definition and the group benefit ends regardless.
- If an examiner instead concluded she is not totally disabled because she still works, the residual rider pays proportionately: roughly a 50% income loss times $7,000, or about $3,500 a month, subject to the rider's minimum loss threshold, commonly 20%, and its income-indexing formula.
2. Explain the tax treatment of both premium streams and both benefit streams.
Read the worked answer
- Individual policy. She pays the premium with after-tax dollars and, as an employee, gets no deduction. In exchange the benefits are received income-tax free. That is the highest-value dollar in the picture.
- Group plan. The employer pays 100% of the premium, deducts it, and does not include it in her income. The trade-off is that benefits from an employer-funded plan are taxable to her as ordinary income when received, generally reported as wages by the payer.
- Offset mechanics. The group plan's other-income offset normally counts the gross amount of the individual benefit regardless of its tax status. Here the arithmetic makes it moot because the individual benefit alone exceeds the group formula.
- Practical result. In the months that matter she receives $7,000 a month tax-free and nothing from the group plan, against a pre-disability income of $18,000. The taxable and non-taxable mix belongs in the suitability discussion, not just the monthly dollar amounts.
- Nuance. Had she been self-employed, individual disability premiums would be deductible and the benefit would be taxable to the extent of the deduction. As an employee she gets the better end of that trade.
3. Was the coverage structured well? What should the agent review now?
Read the worked answer
- She is paying for coordination she never receives. The individual no-offset clause protects her own benefit, but the group plan offsets against that same benefit, so the two policies do not stack. For the first 24 months the group plan contributes nothing. The real question is whether the individual benefit is large enough to carry the risk alone.
- The group definition is the weak link. Any-occupation at 24 months is the wrong test for a surgeon whose specialty is manual. The individual own-occupation contract is the coverage that pays when she can run a practice but cannot operate, which is the most likely long-term outcome here.
- Verify the individual contract terms: true own-occupation on a specialty basis versus own occupation as generally performed; the exact 'not working elsewhere' language; whether the residual rider uses a loss-of-income formula and includes a recovery benefit; whether there is a COLA or future increase option.
- Consider increasing the individual benefit, subject to issue limits typically in the range of 60% to 70% of income, because the group benefit is taxable and the employer can terminate the plan.
- Read the group certificate for a monthly maximum, a Social Security or workers' compensation offset, and the exact definition of other income. Some plans offset individual disability benefits and some do not; the certificate controls.
- At claim time, file both claims immediately and simultaneously. Elimination periods run concurrently, and a late group filing can cost months of benefit that cannot be recovered.