Key takeaways
- Group long-term disability typically pays 60% of base salary to a monthly cap of $10,000 to $15,000, and the benefit is taxable when the employer pays the premium.
- Bonuses, commissions, RSUs, and partnership distributions are usually excluded from covered earnings, so the gap grows with income.
- An individual policy is portable, tax-free if paid with after-tax dollars, and can be written on an own-occupation definition that group plans rarely offer.
- The probability of a disability lasting 90 days or more before 65 is meaningfully higher than the probability of death, and the financial damage is larger.
Most high earners have life insurance and assume the employer's disability plan has the other risk covered. It usually doesn't. Group long-term disability was built to replace a modest salary for a modest household, and its formulas, caps, and definitions leave a professional earning $300,000 or more with a benefit that wouldn't cover the mortgage. Disability before 65 is more likely than death, and it stops income while the expenses keep coming. In a lot of the plans we review, this is the biggest risk nobody has addressed.
What a group plan pays
The typical employer long-term disability plan replaces 60% of base salary, up to a monthly maximum of $10,000 to $15,000, after an elimination period of 90 or 180 days, until age 65 or Social Security normal retirement age.
Three features whittle the real number down.
The cap. At 60% with a $10,000 monthly cap, the benefit maxes out at $200,000 of salary. Someone earning $400,000 gets $10,000 a month. That's 30% of pay.
The definition of earnings. "Base salary" excludes bonuses, commissions, equity compensation, and, for partners, distributions. A physician with $250,000 of salary and $150,000 of production bonus is insured on the salary. An executive with $300,000 of salary and $500,000 of RSUs is insured on the salary. Partners in professional firms often have little or no W-2 salary at all, so group plans cover them thinly or not at all.
Taxation. When the employer pays the premium and doesn't include it in your income, the benefit is taxable. A $10,000 monthly benefit is $7,000 or less after tax for a household in the 32% bracket. Some employers let employees pay the premium with after-tax dollars, or gross it up, which makes the benefit tax-free. Worth asking.
Add it up and a household earning $450,000 with a group plan might see $7,000 a month after tax, replacing under 20% of what they were making. The plan isn't wrong. It was just designed for someone else.
Other limits in group contracts
Group policies usually define disability as the inability to perform your own occupation for the first 24 months, then any occupation you're reasonably suited for by training and experience. A surgeon who can no longer operate but can teach may lose benefits at month 25. Mental health and musculoskeletal claims are often limited to 24 months. Benefits get offset by Social Security disability and other income. And the coverage ends when the job ends, with conversion rights that are limited and expensive.
The individual policy
An individual disability policy fills the gap with features the group plan doesn't have.
- Own-occupation definition for the full benefit period, or at least a long one. For physicians, dentists, attorneys, and other specialists, this is the feature that matters most.
- Tax-free benefits, because you paid the premium with after-tax dollars.
- Coverage of total compensation, including bonuses and, with documentation, equity and distributions, up to the insurer's issue limits.
- Portability: the policy follows you through job changes and self-employment.
- Non-cancellable, guaranteed renewable terms, so premiums can't rise and the insurer can't change the policy on you.
- Riders: residual or partial disability benefits for reduced earnings, cost-of-living adjustments on benefits, and a future increase option that lets you add coverage as income grows without going through medical underwriting again.
Insurers limit total coverage, group plus individual, to roughly 60% to 70% of earned income, with lower percentages at very high incomes and monthly benefit maximums in the $20,000 to $30,000 range for most carriers. You size the individual policy to the gap between that limit and the group benefit.
Cost
Individual disability insurance isn't cheap: roughly 1% to 3% of the covered income per year, higher for physicians in surgical specialties and for women, and rising with age at purchase. A 40-year-old buying $10,000 a month of own-occupation coverage might pay $4,000 to $7,000 a year. It's the most expensive personal insurance most people will ever own, which is exactly why it gets skipped. And it covers the risk that would do the most damage. Buy young, when premiums are lower and health is good, and use the future increase option to grow it. That's how you keep the cost in check.
Who needs it most
Physicians and dentists. Long training, income that depends on physical and cognitive ability, and specialties that can be lost to a hand injury or a bad back while general medicine remains possible. Own-occupation isn't optional here. Our post on planning for physicians covers the rest of the picture.
Partners and business owners, who often have no group coverage at all and whose disability threatens the business along with the household. A business overhead expense policy, which pays the firm's fixed costs while the owner is out, is a separate product and often a necessary one.
Anyone whose household runs on one high income with a long way to retirement and obligations (mortgage, tuition, support) that don't pause.
Who needs it least: households with enough assets to retire today, dual-income households where either income covers the bills, and people within a few years of retirement, for whom the benefit period is short and the premium high.
What we do
The insurance review starts by reading the group plan's summary plan description, not the benefits portal, to find the cap, the earnings definition, the tax treatment, and the occupation definition. We compute the after-tax gap against what the household actually spends. If a policy is needed, we specify the benefit, the definition, the riders, and the elimination period (longer is cheaper, and a household with an emergency fund can take 180 days), and we refer you to an independent agent who can quote across carriers. We get nothing from the sale. That's the only way advice about how much to buy can be trusted.
Frequently asked questions
Is Social Security disability enough?
No. SSDI requires the inability to do any substantial work, has a five-month waiting period, and pays a maximum of roughly $4,000 a month in 2026 for the highest earners. Most professional disability claims wouldn't qualify anyway.
Should I take the employer buy-up option?
Often yes, if it raises the cap or covers bonuses, and especially if it's paid with after-tax dollars. It generally costs less than an individual policy but keeps the group definitions and ends with employment. You can combine the two.
Are premiums deductible?
Individual premiums aren't deductible, which is why the benefits are tax-free. Business overhead expense premiums are deductible to the business, and those benefits are taxable.
What if I already own a policy from residency?
Keep it. Exercise the future increase option now that income has grown, and review the definitions. Policies bought during training are often the best contracts a physician will ever be offered.
Joseph G. Valerio, CFP®, EAFounder and Lead Advisor at Valerio Wealth Management, a fee-only, fiduciary virtual family office in Miami, Florida. One advisor, credentialed in both financial planning and federal tax. About Joseph
This article is general education, not individualized advice, and it is not tax, legal, or accounting advice. Figures reflect federal law for the year stated and can change. Valerio Wealth Management does not prepare or file tax returns. Speak with a qualified professional about your own situation before acting.
In this article
Want this applied to your own numbers? A 30-minute introductory call is the first step.
See if you’re a fit