Why Provide Disability Insurance for Employees?
Of all the benefits employers routinely provide for employees, disability insurance remains one of the least-discussed options. This is startling, considering the fact that there are millions of Americans who are currently disabled and unable to earn income from employment.
 |
What is Short-Term and Long-Term Disability Insurance?
Disability insurance is a type of insurance offered to replace lost income in the event that an individual becomes disabled for any length of time. It can be offered as short-term disability coverage, long-term disability coverage, or a combination of both. Some short-term disability insurance will also cover pregnancy complications.
Typically, this type of insurance will:
- Replace a percentage of the individual’s lost income for a set amount of time. For example, many disability insurance providers will provide 60 percent of the person’s income. This benefit may continue for up to half a year for short-term disability coverage. It may continue for many years for long-term disability coverage. In some cases, long-term disability coverage can continue until retirement or even for life, depending on the coverage details.
- Require a waiting period before coverage begins. For short-term disability, this might be as little as 1 week. For long-term disability, it could be from 1 to 6 months.
- Have coverage limits. Regardless of the employee salary level, the coverage will typically have a maximum weekly or monthly payout amount per individual. The coverage limits may be $1,000 per week or $5,000 per month, for example.
What Are the Benefits to the Employer in Providing Such Coverage?
The benefits for employees are clear when it comes to disability insurance, but there are actually a lot of benefits for employers as well. Here are some examples:
- It can act as a recruiting tool for employees who value the coverage and can set you apart from other employers.
- It’s not a cost-prohibitive benefit; the cost of coverage for all employees is not proportionally higher than the cost to cover an individual.
- It can assist employees in staying financially afloat during difficult times (such as after a major injury), which may mean they are able to return to work sooner and bring the business back to full productivity faster.
- Disability insurance sometimes comes with rehabilitation services, which can also help get employees back to work faster.
Considerations When Selecting Disability Insurance
When selecting disability insurance, it’s important to bear in mind that there is a high degree of variability between insurance coverage provided by different insurers. Here are a few things for employers to keep in mind when evaluating coverage options:
- Know that different providers may have their own definition of “disability.”
- Some will not offer coverage unless the individual is unable to perform any job, while others will provide coverage if the individual is unable to perform his or her current job (“own occupation”). The latter is typically preferable, since it will cover your employee and allow him or her to stay employed by you after a short-term disability.
- The definition of disability may also exclude common injuries, such as back injuries.
- It’s critical to understand what’s covered simply based on premium alone—the coverage difference can be significant.
- Assess the required waiting periods before coverage kicks in. Your employees will still need to have income during those periods—long waiting periods can cause hardships.
- Compare the coverage duration for both short- and long-term coverage. For short-term disability, coverage lasting up to 6 months is typical. For long-term disability, however, coverage periods vary a lot more. It could only be 2–10 years, it could be up to age 65, or it could be for life. Obviously, this makes a big difference to anyone receiving it.
- Remember, disability insurance does not replace workers’ compensation insurance or vice versa. It should not be assumed that workers’ compensation insurance provides the same coverage. Workers’ compensation insurance only covers injury or illness originating from or exacerbated in the workplace, not otherwise. Disability coverage does not have this limitation.
- Consider whether the insurance terms count an employee’s bonuses, overtime, and commissions when determining the pay rate for benefits.
- Check on the maximum payout amounts. Typically, there are weekly or monthly payment caps, meaning highly compensated employees may not actually receive 60 percent of their former income because they will reach the cap. Also find out what other income counts against the payout amount, such as social security or other disability pay.
- Look into what rehabilitation services, if any, are included. These types of services may help some disabled employees get back to work sooner, which benefits everyone.
- If you cannot pay for coverage for your employees, you could still consider getting a group plan and allowing employees to enroll voluntarily and pay some or all of the premiums individually. This can still be a benefit and cost savings for employees over buying disability insurance separately.
- Consider how well the provider’s services integrate with other related insurance and benefits, such as workers’ compensation and FMLA leave. Also, find out how much administration the plan provides. Ideally, the provider will communicate directly with the employee through all stages and not be an administrative burden for the employer.
- Find out whether the plan offers partial or residual coverage for employees who can return to work but can no longer work full-time.
- Ensure that the provider is easy to work with and provides easy access to information.
These considerations matter not just for the cost of the premium—they also affect the quality of the coverage offered.
Does your organization provide short- or long-term disability insurance for employees.
This article does not constitute legal advice. Always consult legal counsel with specific questions.
About Bridget Miller:
Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.