What Is Disability Insurance & Should You Offer It To Employees?
According to the Social Security Administration, 25% of all 20-year-olds will become disabled and unable to work sometime before reaching the age of 67. But unlike with medical, dental, and vision insurance, very few people know that there are insurance products designed to replace a portion of their income when they become ill or disabled and cannot work.
What Is Disability Insurance?
Disability insurance is, as the name suggests, insurance provided in the event that an employee is disabled and cannot work. Unlike workers’ compensation insurance — which provides benefits like partial wage replacement if employees get hurt on the clock — disability insurance provides partial wage replacement when employees become ill or disabled away from work, and can’t work.
In essence, health insurance benefits enable employees to seek needed medical care. Disability insurance replaces a portion of employee income when they can’t work because of an illness or disability.
For the most part, disability insurance will not replace all of someone’s income. Instead, disability insurance provides wage replacement benefits that cover, on average, up to 60% of employee earnings. Those payments usually go up to a cap, or a maximum monthly payout. Although that’s not ideal, receiving up to 60% of wages is still better than 0% — and having that income stream can be very important to an employee and their family.
Long-Term vs. Short-Term
There are two types of disability insurance: short- and long-term. Short-term disability typically pays out a portion of employee’s income from 9 to 52 weeks depending on the plan. Short-term disability benefits generally kick in after a waiting, or “elimination” period, which is usually set from seven to 14 days.
Often, employees will use accrued sick time or PTO time during this waiting period. Under certain circumstances, there will not be a waiting period. The applicable plan document should provide information about a waiting or “elimination period.”
Long-term disability picks up where short-term disability leaves off. Long-term disability insurance usually provides about 50-60% of an employee’s base wages. Long-term disability benefits are paid out for the number of years indicated in the plan document. There are long-term disability plans that pay out partial wage replacement benefits until a certain age, such as 65 years old.
Some private companies offer both short-term and long-term disability insurance plans, whereas others leave people to buy plans as an individual.