A 48-year-old engineer earning $250,000 has group disability at 60% replacement. He thinks he would receive $150,000. His employer pays the premium. At a 32% bracket, his after-tax benefit is $102,000, just 41% of gross pay. That 19-point gap is exactly what the exam tests.
HIGH-FREQUENCY: The definition is the most important policy feature. Policies diverge most dramatically here:
Own-occupation: you are disabled if you cannot perform the material duties of your specific job. A neurosurgeon who loses fine motor skills qualifies even if she could teach.
Any-occupation: you must be unable to perform any occupation suited to your education, training, or experience. That same neurosurgeon might not qualify because she could practice general medicine.
Split definition: own-occ for an initial period (typically 2, 5 years), then switches to any-occ. For a surgeon permanently unable to operate, benefits stop in year 6 when the definition shifts. The correct advice: extend the own-occ period or replace the policy.
Social Security Disability Insurance is a federal safety-net program funded by payroll taxes, designed to replace income only for workers who are severely and permanently disabled.
Common mistakes
- Reporting 60% as the effective replacement rate when employer pays. A 60% ratio with employer-paid premiums at 32% means ~41% after tax. The exam provides the marginal rate for a reason. Trap: "$150,000 annual benefit" when the correct after-tax figure is ~$102,000.
- Overlooking the split-definition transition. When a policy says "own-occ for 5 years, then any-occ," the coverage weakens dramatically at the transition. For a surgeon or attorney, this is the most critical gap. Trap: "adequate coverage to age 65" when the definition switches in year 5.
- Treating SSDI as reliable income replacement. The SGA standard is extremely strict. A specialist disabled from their own occupation but capable of other work likely does not qualify. Trap: "SSDI will supplement the gap" for a surgeon who can still teach.
Bottom line
- Own-occupation = cannot perform duties of your specific job; any-occupation = cannot perform any suitable job
- Employer pays premium = taxable benefits; you pay premium = tax-free benefits
- Split definition transitions from own-occ to any-occ after 2-5 years, dangerous for specialists
- COLA increases benefits during a claim; FIO allows buying more coverage before disability
Exam shortcut
When you see employer-paid premium + marginal tax rate in the same question, immediately flag benefits as taxable and compute after-tax. If it says 60% at 32%, the real replacement is ~41%. "Who Pays, Who Profits", employer pays the premium, government profits (taxable). Employee pays, employee profits (tax-free). "COLA = Claim time. FIO = Future time." Both increase the benefit amount, but at opposite points on the timeline.
The full lesson (about 2,263 words, 15 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- C.20
Browse all free CFP lessons or jump into free CFP practice questions.