How Does Disability Insurance Work?
Employers often offer ancillary benefits like disability insurance as part of the enrollment process, but unlike health coverage, not all employees will need ancillary benefits. So, what is disability insurance? Here’s what you need to know, including the difference between short- and long-term disability coverage.
What is Disability Insurance?
Disability insurance is an agreement between an insurer and an individual that requires the insurer to pay out a monthly cash benefit to supplement wages lost due to an individual's disability in exchange for a monthly premium. That’s why it’s often referred to as disability income insurance.
Before explaining how employer-sponsored disability insurance works, though, let’s take a moment to clarify how it differs from FMLA, Workers’ Compensation, and Social Security—which all guarantee some type of disability benefit to certain individuals under certain circumstances.
The Family and Medical Leave Act (FMLA) only provides 12 weeks of unpaid, job-protected leave per year to employees who have worked for a covered employer for at least 12 consecutive months. “Covered employer” refers to any private organization with at least 50 employees, government agencies, or public schools. To be clear, even if an individual qualifies for FMLA leave, their employer is not required to pay them for that time off.
On the other hand, some government programs—such as Social Security and workers’ comp—pay out cash benefits to certain employees with a qualifying disability.
On the federal level, Social Security Disability Insurance (SSDI) provides monthly payments to employees who have paid into the program through Social Security taxes withheld from their paychecks long enough to qualify. For 2022, the SSDI threshold is $1350 per month for beneficiaries who are not blind and $2260 per month for those who are.
On the state level, workers’ compensation programs provide healthcare benefits, partial income replacement, or both to employees who are injured or become ill as a direct result of their job. In most states, workers’ comp is funded by employers through private insurers. State requirements vary widely; in fact, one state, Texas, does not even require employers to have workers’ comp insurance at all.
Even with these protections in place, there are still many disabled individuals unable to work who do not qualify or need more coverage.
That’s why many employees should consider electing disability insurance through their employer, who can often obtain lower premiums through group coverage.
How Does Disability Insurance Work?
Premiums are typically deducted from an employee's paycheck and can vary based on age, income, and occupation. For example, an older individual in a higher risk industry will pay higher premiums than a younger individual in a lower risk industry. The cash benefit of a disability policy is based on an employee's income—usually 45% to 65%.
Disability policies also have waiting periods—also called elimination periods—which vary by policy. This means the policy will not begin to pay out until a set amount of time has passed since the onset of illness or injury.
What’s the Difference Between Short- and Long-Term Disability?
There are generally two types of disability coverage: short-term and long-term.
Short-term disability—as the name indicates—only covers an individual for a few weeks or months—sometimes up to a year—depending on the policy. Most short-term policies have an elimination period of up to two weeks before benefits will kick in.
Long-term disability policies are usually designed as an extension of a particular short-term policy. So, even though long-term elimination periods will vary, they are often equal to the length of time that the accompanying short-term policy will cover. In other words, long-term coverage begins when short-term ends. Long-term policies—like SSDI, for example—may pay out for a few years or even throughout an individual’s life.
Like all insurance, details vary by policy, and employees should consider their unique situation and needs when determining whether to enroll in a disability insurance plan.
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