Table of Contents
Table of Contents
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What Is Disability Insurance?
Disability insurance is offered through an employer’s benefits package as supplemental insurance in the event that an employee is temporarily disabled. The insurance can provide financial assistance while the employee is on a medical leave. Some employers can contribute toward a portion or all of the coverage for employees.
There are two types of temporary disability: total and partial. Total disability is when the employee is unable to perform any of their job functions. Partial disability is when the employee is able to do some work. The carrier will determine the correct payout based on the type of disability.
Why Is Offering Disability Insurance Important for Employers?
Employers and employees both benefit when disability insurance is offered in a comprehensive benefits package. Reasons are as follows:
- Helps the employee financially. Disability insurance provides monetary advantage to an employee who is temporarily unable to work due to accident, illness or disability.
- Improves recruiting success. Including disability insurance in a benefits package helps an employer be competitive in recruitment, and both attract and retain top talent.
- Provides peace of mind. Disability insurance can provide peace of mind to an employee who will be out of work for medical reasons.
Types of Disability Insurance
There are two main types of disability insurance: short- and long-term. Let’s review some of the similarities and differences between them.
Short-Term Disability (STD)
This is the most common type of supplemental insurance in which employees can choose to enroll. Short-term disability provides monetary payout at a percentage of the employee’s salary. A waiting period will apply. The insurance carrier will assign a “case manager” to the claim who will then work with the employee to gather medical documentation, review the information and determine continued eligibility. STD payments will continue through a designated period and end if and when the employee returns to work.
Qualifiers for STD payments include, but not limited to:
- Maternity leave
- Cancer treatments, such as chemo/radiation
- Surgery and recovery period which will have the employee unable to work beyond the waiting period
- Injuries sustained in a car accident which have left the employee unable to perform their normal job duties for an extended period of time
Long-Term Disability (LTD)
Long-term disability provides monetary payout (also at a portion of the employee’s salary) for individuals who have been temporarily disabled and exhausted STD term limits. There is no waiting period for a payout as long as the employee has been unable to perform any function of their job for six months. If an employee was also enrolled in short-term disability, there will be no disruption in payment.
What Does Disability Insurance Cover?
Disability insurance will supplement a portion (anywhere from 45%-65%) of an employee’s salary if they are unable to report to work due to accident, illness, injury and/or disability. The most common use for short-term disability is maternity leave.
Note, both forms of payment (STD & LTD) may be subject to taxes if the benefit is employer-paid. Please defer to your tax professional, payroll department or HR/Benefits representative.
What to Consider When Choosing Disability Insurance
Employers should consider the following when offering disability insurance to offer their employees:
- Will a portion of the premium be covered by the employer or all the premium?
- Will it be offered as strictly a voluntary benefit or will employees be auto-enrolled in the benefit?
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Questions You’ve Asked Us About Disability Insurance
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Some states mandate disability insurance. Be sure to check with your local and state employment laws to ensure compliance. The states which require the organization to carry both STD & LTD insurance for their employees, through either state agencies or private carriers are:
- California
- Hawaii
- New Jersey
- New York
- Rhode Island
Offering short-term and long-term disability has benefits for both employees and employers. Employers are offering their team peace of mind in knowing that should an accident/injury occur, there will be opportunity for supplemental income to cover any lost wages.
STD and LTD insurance is often overlooked by employees. The reason for this could be partially due to not knowing what the premium per pay will be since the rates are calculated based on employee’s age and annual earnings. Carriers have made the formula available in the summary description. Employees are able to determine the premium using the following calculation:
- What are your annual earnings?
- If you are an hourly/non-exempt employee, the annual salary can be calculated as follows: hourly rate x # of hours you work per week x 52. 20.00 (per hour) x 35 (hours per week) = $700 x 52 (weeks in a year) = $36,400/year
- Calculate your weekly earnings
- Hourly/Non-exempt employees: multiply hourly rate by number of hours worked in a week.
- Salaried employees: Divide annual salary by 52
Employees may be eligible in case of an injury or illness which has prohibited them from performing any or all their regular job duties. A waiting period may apply. Most importantly, the employee must have been enrolled in the benefit.
Sarah is the HR Manager for a small non-profit in Phoenix, AZ. Her specialty is working with small organizations in developing the HR department. She holds a Master’s degree in I/O Psychology and considers herself to be a true HR nerd. When she isn’t helping the organization succeed, Sarah enjoys reading, running and spending time with her friends & family. Sarah dreams of one day being an Employment & Labor attorney.
