Disability insurance, when offered by an employer, covers your employees with a percentage of their income during periods when they cannot work due to an illness, injury or condition that occurs outside of the workplace. Disability insurance is a common value-added benefit offered by employers, but it can also be purchased in the marketplace by an individual. It comes in 2 forms: short term (STD) and long term (LTD), as well as a subtype called supplementary long term disability insurance.
In this article, we will explain:
- What Disability Insurance Is
- Workers’ Compensation vs Disability Insurance
- What Disability Insurance Covers
- Short Term vs Long Term Disability Insurance
- Benefits of Offering Disability Insurance
- How to Offer Disability Insurance to Your Employees
Did you know that payroll software like Gusto offers disability insurance? It can be a great, affordable option for small business owners to kill two birds with one stone (payroll and benefits). Click here for a free quote.
What Disability Insurance Is
The basic idea of disability insurance is that it replaces the income of someone due to their inability to work, be it from injury, pregnancy, medical condition, or accident. The important thing to note is that the injury, condition or accident would be from their personal life and did not happen in the workplace.
Let’s quickly address what disability insurance is versus workers’ compensation, which is a commonly confused point.
Workers’ Compensation vs Disability Insurance
You might be asking yourself- but wait, isn’t this the same as workers’ compensation?
The key difference between disability insurance and workers’ compensation is *where* the illness, accident, injury, or condition occurs.
- If it occurs in the workplace, then the employer would need to pay for the employee’s issues out of workers’ compensation. Think a slip on spilled water in the break room that breaks an employee’s arm or a car accident in a company vehicle.
- If it occurs outside the workplace, be it a broken leg skiing on vacation or a pregnancy, then that condition would be covered by disability insurance.
Also, workers’ compensation is state-mandated insurance and required of business owners. Disability insurance is only mandatory in a few places, which we will outline next.
Who Has to Provide Disability Insurance
In most states, employers are not legally required to provide disability insurance. Only a few places require it, including:
- New Jersey
- New York
- Rhode Island
- Puerto Rico
These states (and Puerto Rico) simply require that employees be covered by short-term disability insurance through state-run programs or by the equivalent private or self-insurance coverage. We advise that you check your individual state’s Department of Labor website for more information, or use a payroll software like Gusto since they will make sure you are compliant.
Short Term vs Long Term Disability Insurance
There are two main kinds of disability insurance, short term and long term. There is also a lesser known kind of long term disability called supplemental disability. We will look into these types in detail next, and we provide a summary in this table of the 2 bigger ones:
|Feature||Short Term Disability (STD)||Long Term Disability (LTD)|
|Waiting Period Before Benefits Start||7+ days; sick leave must be exhausted prior to benefits becoming active (potentially vacation too)||Sick leave, vacation time, and any STD plan must be exhausted first. Waiting period usually 30-180 days.|
|% Salary Typically Covered||Usually 50-60%; some policies go up to 80%||Usually 50-60%|
|Length of Coverage||13-26 weeks||Up to 5 years; some plans can go for a lifetime|
|Premium Cost (avg. 2017)||Wide range from marketplace to through an employer ($7/ month = upwards of $100)||Wide range from marketplace to employer coverage ($7/ month = upwards of $100)|
|Maternity/ Paternity Coverage||Maternity is covered; check your policy for paternity||Maternity depending on medical situations; check your policy for paternity|
|Companies It Best Suits||All- this is a great low cost benefit that can take the place of maternity leave and taking unpaid leave||Best for industries that can cause injuries, like construction; however, since it’s so low cost, we recommend offering it if you are offering STD as well.|
Short Term Disability (STD):
Short-term disability plans typically pay benefits for when someone is out of work for less than or up to 13-26 weeks depending on the plan. The payout is typically 50-60% of one’s salary, but some policies can go up to 80% of the salary.
Benefits in a short-term disability insurance plan may have different waiting periods (also known as elimination periods) for disabilities stemming from illnesses versus those resulting from injuries. For example, it might be a 7-day wait for illness versus no waiting period for injuries like a broken leg. It also depends on how much sick leave an employer offers; sick leave must be exhausted before STD benefits kick in. An STD plan can may also assist new moms with income replacement during maternity leave.
Long Term Disability (LTD):
Long-term disability plans typically pay benefits for when someone is out of work more than 30 days (or even longer). It’s best to coordinate coverage between LTD and STD so that once sick pay and STD benefits have run out, LTD benefits start immediately. LTD can range from several months to several years of coverage and typically also replace 60% of pay. It is meant for catastrophic injuries or illnesses that happen outside of work, like a car crash that leaves someone paralyzed and unable to work.
Supplemental Individual Disability Insurance (IDI):
A lesser known and lesser used type of disability insurance, this would perhaps come as a value-add that employees would pay for only through their employer. This would simply provide more benefits on top of STD or LTD and makes sense for employees who rely on commissions or bonuses, which are typically not covered by STD or LTD, since those are not salaried.
What Disability Insurance Covers
Basically, both kinds of disability insurance cover a portion of an employee’s salary from their job at the time of the accident, injury, or incident that rendered them disabled.
Amount of Salary It Covers & Time Length
Plans typically replace 50-60 percent of an employee’s salary, although some exclusive plans cover up to 80 percent. Maximum weekly benefits are usually established, and $1,000 per week is usual for an STD policy, whereas LTD typically can cover up to $10,000. LTD also typically ends if an employee reaches 65 and can thus draw on Social Security- so they wouldn’t be covered anymore.
Long story short: you’ll want to check the policy you are buying to cross reference it between portion of salary covered and the maximum benefits allowed.
Also, STD typically covers 13-26 weeks of disability. Long term covers anywhere from a few months up to 5 years, or even potentially a life time. LTD does have a waiting period of 30-180 days (1-6 months or 4-24 weeks) for benefits to become effective.
This is why the best practice is to offer both kinds of disability for complete coverage.
The Fine Print: What is Considered Disabled?
You’ll also want to make sure that you are clear on what the disability insurance considers “disabled”, which can change by the kind of insurance (STD vs LTD).
STD plans typically provide money when an employee is unable to work in his or her “own occupation” or “own job” due to injury or illness. This is a more expansive definition of disability than that in LTD, which considers disability when an employee is unable to work in his or her “own occupation,” or to work in “any occupation” for which the person is suited by education, training, and experience.
A good example of when STD versus LTD matter is if an employee got into a personal car accident. Say Sally breaks her leg coming home from dinner on a Saturday night in a car wreck. Sally would probably use STD in order to recover completely before returning back to work. Sally will eventually heal up and be fine to work, probably within 3 months of time.
But what if Sally got paralyzed in the car accident and she is a waitress? Sally cannot go back to not just your restaurant, but to any waitressing role that exists, making her eligible for LTD benefits (after STD benefits are exhausted). This would be the distinction by an insurance company in determining if LTD benefits should kick in.
Disability Insurance and Maternity
Disability can be a great way to cover maternity leave for your employees. If you have child-bearing age employees, we recommend offering disability insurance as a benefit in order to keep those employees (and attract more talent!).
For example, if a woman had STD and LTD and became pregnant, she would be eligible to use her disability benefits after she had her baby. If the birth was normal and healthy, she would probably only be eligible for her STD, or even just a portion of her STD. If the birth was complicated and there were lasting issues for her and the baby, LTD would then also kick in (most likely). The woman in question would have to submit medical documents from her doctors “proving” her case to the insurance company to get her benefits.
Benefits of Offering Disability Insurance
Any benefits are a big perk for employees who work at a small business. Disability insurance is the same, but I would argue that it is an incredibly useful benefit since it can be used for “normal” life events like having a baby. It can really help beef up your appeal to potential new employees and those that already work for you.
The big perks of offering disability insurance are:
- Recruiting perk
- Some disability insurance providers help employees to return to work, which means less recruiting/replacement costs and other work on you. For example, if you have an employee who has knee surgery, the disability company will help make sure they are going through physical therapy and recovering.
- Appeals to your employees / makes them feel supported
Cost of Offering Disability Insurance
The average cost of STD and LTD through one of our provider options below ranges can start at under $30/month ($15 per pay period!). The plan you choose will greatly affect the cost, as will your industry and the age of your employees. There are other plans that may cost up to $100/month if you have an older employee in a dangerous industry.
Most employers add STD and LTD to their benefits plan as a cost to just the employee, making it a voluntary benefit. However, we would encourage you to consider paying for this benefit as the employer. Especially if you do not offer health insurance, this can make working for you more appealing to potential new hires as well as to support your employees through a medical time of leave (versus them having to take time off that is completely unpaid).
Remember, STD can also double as maternity leave, which is a huge perk, and may include paternity leave depending on your policy.
How to Offer Disability Insurance to Your Employees
One thing to note here is that it is MUCH easier to offer disability insurance through your payroll and workers comp provider, like our recommended payroll and benefits provider Gusto.
Overall, you have 3 options for how to provide disability insurance:
- Professional Employer Organization (PEO). A PEO is a co-employer that can help with all of the HR functions, from payroll to taxes to benefits for your employees. This is the most “hands off” solution, since a PEO can manage everything on your behalf. Learn more about PEOS in our comparison of JustWorks, Insperity and TriNet.
- HR Benefits platforms. Many software companies that specialize in HR and payroll also now offer benefits, like Gusto. You can then have HR software in addition to benefits and payroll all in one place.
- Insurance brokers and insurance companies. Insurance companies, like Unum, can offer disability insurance for small businesses. If you are only offering disability and already have a payroll system you like, like Quickbooks, this can be a good option.
You’ll want to also look at how successful the insurance carrier you’ve chosen has been in helping people return to productive work, and you’ll want these services to also be incredibly easy for an employee to access if they need them. This all saves time and money, and it makes offering disability insurance worth it even more so for you as the employer.
One big piece of advice: make sure you and your employees can get everything you need online. This one factor (versus some of the older companies operating by paper still) will be a huge time saver and headache solver should an employee ever need to use their disability insurance.
The Bottom Line
Disability insurance can be an attractive, low-cost benefit that you as the employer can provide to your employee that would really make a difference in their lives. Especially if you do not offer health insurance or maternity leave, we would recommend you consider offering disability insurance to help lessen the blow if an employee ended up in a medical situation.