How is Prior Income Calculated in a Partial Disability Claim?
Our last post looked at whether a partial disability claim may make sense for a dentist to file. We touched on the fact that prior monthly income is a key component in determining what your benefit amount will be.
Different rules apply when it comes to determining prior monthly income. Each policy will be different, and the rules can shift depending on how long you are on claim. Sometimes, prior income is determined by looking back at previous tax years. For example, the policy might state that:
Pre-disability earnings means the sum of your highest Annual Earning for any two full tax years within the three full tax years preceding the date your Disability began, divided by 24.
In other instances, the insurance company will only look at income for a certain time frame (e.g., the past 12 or 24 months). See, e.g.:
“Prior Monthly Income” means the insured Member’s average “Monthly Income” during the greater of either the 12 or 24 consecutive month period which ends on the last day of the month immediately preceding the first day of Total Disability and/or Residual Disability for which claim is made.
Most insurance companies use the dental practice’s profit and loss statements to determine the monthly profit/loss, then factor in the dentist’s ownership percentage, and finally add any compensation (e.g. W-2 wages) that the dentist received that month to determine monthly income.
This can be complicated, however, because not every dentist keeps profit/loss statements, and if they do have profit/loss numbers they may be broken down annually or quarterly as opposed to monthly. Oftentimes, this results in a need for the numbers to be averaged-out, which can make the calculations less precise and, in some cases, less favorable to the dentist.
This also comes up with dentists filing claims under business overhead expense (BOE) policies, which pay replacement income to cover the dental practice’s monthly expenses during periods of disability.
Accordingly, it is best to keep your practice’s records on a monthly basis, because disability benefits are calculated using month-to-month numbers. An experienced disability insurance attorney can help ensure that your insurance company is correctly calculating your prior monthly income, as well as your monthly loss of income, which we will cover in our next post.
