What is Disability Insurance, and Should You Offer it to Employees?

Like all insurance, disability insurance has its own nuances and terms that can confuse anyone not immersed in the insurance world. Let’s look at the basics of disability insurance.

Disability insurance is not just for senior citizens. According to the Social Security Administration, 25% of all 20-year-olds will become disabled and unable to work sometime before age 67. But unlike medical, dental, and vision insurance, very few consumers know there are specific insurance products designed to replace a portion of their income when they become ill or disabled and cannot work.

What is Disability Insurance?

Disability insurance partially replaces workers' wages if they cannot perform their duties due to an off-the-job covered injury or illness. The concept is that your employee will be able to focus on their recovery, worry less about bills and return to work more quickly.

While disability insurance is often considered a staple of a comprehensive benefits program, one in three working Americans does not have adequate disability coverage. If you didn’t offer disability insurance, how would you help your employees and their families in the event of a disabling illness or injury?

Differences in Disabilities

Five states have state-mandated disability insurance requirements:?California,?Hawaii,?New Jersey,?New York,?Rhode Island,?and?Puerto Rico. The details vary by state, including specific stipulations for time periods of coverage, minimum required time the employee worked with the company, percentage of wages, minimum payments, and more.?

State disability tax is a payroll tax. The money from this tax is put into a state disability insurance program that provides financial assistance to workers who lose the ability to work due to physical or mental disabilities unrelated to their profession.

California is the only state with a tax specifically called a State Disability Insurance (SDI) tax. SDI tax is paid through employee payroll vs. workers’ compensation insurance, which is paid for by employers.?

The other four states have temporary disability insurance (TDI), and the employer may pay for the entire or partial cost of providing TDI. It varies by state.

Also, your registered business and where your employees live and work can impact the type of coverage you need to offer.

The Long and Short of It

The disability insurance from those five states covers short-term disability. Short-term disability is intended to cover employees immediately following a severe illness or injury. Long-term disability insurance is intended to maintain income replacement if a condition keeps them out of work past the end of their short-term disability benefit period, even to retirement, depending on your plan.

Many private businesses offer long-term disability plans to their employees as part of a larger benefits package, including healthcare and sponsored retirement plans. Employees typically pay a portion of the cost.?

Stay tuned for my next blog. I’ll delve into long-term disability.

If you have any questions about business or personal liability insurance, reach out to us here.