Why disability insurance is essential for financial wellness

As helpful as it would be to be able to predict, you never know when an injury or illness may take place. However, there is a way to help employees be more prepared. Disability insurance is a coverage option that allows you to safeguard your workforce and help them maintain financial wellness while they recover. And while disabilities and related expenses can vary, this insurance provides limited coverage at little or no cost to employers.[1]

If you’re considering adding this coverage option as part of your benefit packages, it’s important to know the specifics and key terms. We’ve broken down those details in the sections below to help you learn more about the options, benefits and important considerations. 

What is disability insurance?

Disability insurance provides a source of income to those who may not be able to work for a certain amount of time due to a disability. It’s a coverage option available through both public and private programs. And like most policies, there are associated costs. Typically, the coverage will be about 2% of the individual’s annual salary—of course, this will vary depending on the provider. [2]

Types of disability insurance

There are two main types of disability insurance options available—long term and short term. However, there are also several personnel policies to help keep individuals protected.

• Short-term disability insurance: This policy replaces income for a few months (almost never more than a year) until an employee can return to work.
• Long-term disability insurance: Available for a much longer period, this policy is designed to last for several years, even up to retirement if needed.
• Group disability insurance: A company will provide this coverage for employees. The premium is typically lower than an individual policy because it’s for a large group of people.
• Individual disability insurance: Typically purchased through a financial professional, this is coverage that individuals get for themselves. Most policies are long term.
• Social Security disability insurance: This is coverage that comes with Social Security benefits. It’s typically harder to qualify for and benefits tend to be lower than a policy you’d purchase individually or through work.[2]

Short-term disability versus long-term disability

Both short-term and long-term disability insurance act as a safety net for employees who get hurt, but each serves different purposes depending on the individual’s need. It’s important to understand the details and obligations regarding both types of insurance to help ensure adequate coverage is in place. So, let’s take a closer look at what differentiates the two. 

Like the name suggests, short-term disability insurance covers an employee’s compensation temporarily if they are unable to perform their duties because of serious medical conditions. Depending on the circumstance, the coverage can last for a few weeks or even a year. It supplements between 40% and 70% of salaries, provides assistance for a temporary period and typically ensures a greater percentage of income, which can be as high as 70%. 

Meanwhile, long-term disability is offered when employees cannot perform normal day-to-day tasks, not just the functions of their current role. Individuals can use this coverage for an extended period of time though and typically receive nearly 60% of their gross monthly income. 

It’s available for those who have experienced an illness or injury such as back problems, arthritis, mental illness, stroke, cancer or other serious conditions. 

Neither plan has a deductible or minimum spending threshold. But they could cost individuals up to 1% to 3% of their annual salary.[3]

How does disability insurance work?

In the event an individual becomes disabled, they’ll first file a claim with a disability insurance carrier to review for approval. If the claim is approved, the individual can expect to receive a monthly payout between 50% and 70%. This replaces the percentage of their income. 

When you start shopping for a disability insurance policy, there will be several options available, and it may be complicated to sort all the terminology. Here are some key terms that can be helpful to know upfront:

• Payout: The benefits you receive from your policy after you file a claim.
• Premium: This is the amount you pay for your policy.
• Waiting period: Expect to wait 30, 60 or 90 days before your benefits kick in once you’re declared disabled. The time period to receive payment is usually 30 days after the waiting period ends.
• Benefit period: How long your benefits will continue to pay out, which is dependent on the type of policy. For example, a short-term policy will provide benefits for a few months or years. Meanwhile, a long-term policy’s benefit period could last your entire lifetime. Keep in mind, if lifetime benefits do not fit into your budget, consider buying a policy that offers benefits up until retirement age—when you’re eligible for Social Security and Medicare.[4]

What does disability insurance cover

Most common injuries or illnesses that keep you from performing your job can be covered with disability insurance. This includes (but is not limited to):

• Spinal injuries
• Pregnancy complications
• Back pain
• Broken bones
• Arthritis
• PTSD and depression
• Diabetes
• Cancer
• Heart attack and heart disease

Please keep in mind that there may be restrictions when it comes to using disability insurance, such as self-inflicted injuries.[5]

Should you consider disability insurance?

As an employer, you may not be required to offer disability insurance if it’s not a state mandate. Therefore, if you have the option to choose, making the decision that’s right for your specific company may depend on certain factors. 

First, consider what the coverage means for helping attract and retain talented employees. Many individuals may prefer working at a company where they know they’ll be covered while they are gone during pregnancy and maternity leave. It provides an extra level of reassurance and comfort, especially if they have to be put on bedrest. 

If, however, the cost of insurance is not manageable for your business, there is another option. You can offer short-term disability or long-term disability insurance as a voluntary benefit, meaning your employees are responsible for paying the premium. As the employer, you only have to facilitate the purchase of the insurance.[6] 

Benefits of disability insurance for employees

Offering disability insurance can be a key benefit for your employees because it allows them to take the appropriate amount of time off so they can fully recover before returning to work. Otherwise, if employees are not financially covered, they may be tempted to return too early and risk further complications. 

Plus, offering this insurance helps show your commitment to your employee’s well-being. In turn, this can help strengthen worker-employee relationships and boost satisfaction and engagement. 

Beyond stating this coverage in a benefits package, make sure to also educate employees on disability insurance and thoroughly explain how it works. Keeping them well-informed can give them reassurance while increasing their understanding about what is covered. 

While on the subject, this may also be a good time to remind your employees about all their benefits. Refer them to this guide so they can learn more about policies, terms and how to prepare for the future. 

[1] 10 Ways Savvy Employers Can Support Financial Wellness Beyond A 401(k) https://www.forbes.com/sites/brianmenickella/2023/06/07/10-ways-savvy-employers-can-support-financial-wellness-beyond-a-401k/?sh=2c8a48ba11aa (Accessed June 2024)
[2] “What is Disability Insurance? Definition and How it Protects You” https://www.investopedia.com/terms/d/disability-insurance.asp (Accessed February 2024)
[3] Short-Term vs. Long-Term Disability: What’s the Difference? https://www.uschamber.com/co/run/finance/short-term-vs-long-term-disability (Accessed May 2024)
[4] “How Does Disability Insurance Work?” https://www.experian.com/blogs/ask-experian/how-does-disability-insurance-work/ (Accessed February 2024)
[5] “What does disability insurance cover?” https://www.newyorklife.com/articles/what-does-disability-insurance-cover (Accessed November 2024)
[6] What is Disability Insurance, and Should You Offer it to Employees? https://www.justworks.com/blog/what-is-disability-insurance-and-how-does-it-work#what-is-disability-insurance (Accessed June 2024)
[7] “What is Disability Insurance, and Should You Offer it to Employees?” https://www.justworks.com/blog/what-is-disability-insurance-and-how-does-it-work#long-term-vs-short-term-disability-insurance (Accessed February 2024)