When it comes to voluntary benefits, knowing what to offer your employees can be a challenge. For your employees, understanding the right types and levels of coverage can be overwhelming; in the event that they experience a disability, they may not have adequate coverage.
To ensure that you and your employees are adequately protected when such incidents occur, it is important to explore the differences between short-term and long-term disability.
what is disability insurance?
Disability insurance is a special type of insurance that protects your ability to earn a paycheck in the event of a serious illness or injury. disability insurance is not designed to provide benefits if you miss a week of work due to the flu. Instead, it provides coverage after a predetermined waiting period (called the elimination period) for conditions that would keep you from working for extended periods. Disability insurance is generally classified as short-term and long-term, and each type of insurance has unique benefit periods, elimination periods, and benefit amounts.
average time buffs can be used
normally 3, 6 or 12 months
usually 2, 5 or 10 years; it can be for life in some policies
7-30 days; 14 days is the most common
90 days on most standard policies; the insured can choose a longer elimination period to reduce premiums
40-70% of lost wages
60-80% of lost wages
average cost of coverage
1-3% of your salary before taxes
1-3% of your salary before taxes
where to get coverage
employer-sponsored plans, supplemental policies, or private coverage
employer-sponsored plans, supplemental policies, or private coverage
what is short-term disability?
Temporary disability is a type of voluntary insurance that replaces some or all of an employee’s earnings in the event of temporary disability. Generally, this insurance policy is paid in whole or in part by the employer, and the employee must be unable to perform normal job duties, due to illness or injury, to qualify for policy benefits.
Although this coverage may appear similar to workers’ compensation coverage, the two types of coverage have very different applications. Workers’ compensation provides coverage when the illness or injury occurred on the job or as a direct result of work activities, while short-term disability will provide coverage even when the employee is injured outside of the workplace. Generally, an employee cannot qualify for workers’ compensation and short-term disability benefits for the same incident at the same time.
How does short-term disability insurance work?
Short-term disability is designed to protect both the employee and the employer if the worker is no longer able to perform their job as a result of illness or injury. When a qualifying event occurs, an employee may file a claim with a disability insurance carrier for the amount of earnings specified in the policy benefits. this helps protect the employee from financial hardship during the recovery period by providing temporary income for routine expenses.
Short-term disability also benefits the employer. The policy helps protect the employer’s investment in a valued employee by ensuring that the employee can remain financially stable long enough to recover and return to work. Since disability benefits are paid by the insurance company and not the employer, this also provides financial flexibility that would allow the company to pay for a temporary replacement without incurring excessive labor costs.
Some states, such as California and New York, require employers to provide short-term disability coverage to all employees, along with other employee benefits required by law. the state may provide a state-sponsored disability plan, or employers may purchase one through a private provider. In these states, there are many regulations governing short-term disability, so employers should carefully review the regulations that may apply.
What qualifies for short-term disability and what does short-term disability cover?
To qualify for short-term disability benefits, an employee must be unable to do his or her job, as determined by a medical professional. Medical conditions that prevent an employee from working for several weeks or months, such as pregnancy, surgical rehabilitation, or serious illness, may qualify for benefits. Since employers in most states are legally required to provide workers’ compensation insurance to all employees, any injury sustained on the job is typically covered by a workers’ compensation policy and is therefore not eligible for a short-term disability.
While most non-work-related temporary medical conditions are covered under a short-term disability policy, there may be exclusions for pre-existing conditions or intentional and foreseeable injuries (such as those inflicted during the commission of a crime) . While employees may qualify for time off under the Family and Medical Leave Act (FMLA) to care for a sick relative, most short-term disability policies would not provide benefits if the covered employee is not the one with the leave. illness.
When do short-term disability benefits start?
Once a claim is filed, there is typically a short waiting period (the elimination period) of one to 14 days before an employee can begin collecting policy benefits. the waiting period will be specified in the policy terms during registration. For most disability claims, the employee must provide a medical form signed by a physician detailing the illness or injury. the form asks for the first date of illness or injury, and this date is generally used as the beginning of the elimination period.
How long does the short-term disability last?
While benefit periods may vary between different providers, most short-term disability policies provide benefits for three to six months. Some policies, especially those related to a long-term disability policy, may provide short-term coverage for a full year. If an employee needs additional coverage beyond the initial short-term disability period, a long-term disability policy may be needed to extend benefits.
Is short-term disability taxable and how much do you pay?
Proceeds from a short-term disability policy may be taxable, depending on whether it was funded with pre- or after-tax income. Most employer-sponsored disability plans are paid on a pre-tax basis, either directly from the employer or through employee payroll deduction (or a combination of both). In these cases, the insurance proceeds would be taxable, as no taxes were paid on the proceeds used to fund the policy. In contrast, if an employee purchases a private disability policy outside of the employer’s benefit plan, it would be purchased with after-tax earnings and the disability benefits would not be taxed.
The actual amount paid in benefits on a short-term policy is typically 40-70% of the employee’s earnings during the period of the covered event after the elimination period has passed. the employee may elect to have taxes deducted from the benefit check (if applicable) to avoid a tax liability at the end of the fiscal year on disability benefits paid.
what is long-term disability?
Long-term disability is an insurance plan that often works in conjunction with short-term disability to provide income for long-term illnesses and injuries. Once short-term disability benefits are exhausted, a long-term disability policy continues to provide the employee with some income until he is able to return to work.
How does long-term disability insurance work?
long-term disability works the same way as short-term disability. once a plan is implemented, the employee must provide medical proof of a qualifying illness or injury that lasts beyond the long-term disability elimination period. Once the burden of proof has been met, the employee can start receiving the benefits specified in the policy. benefits will continue until the employee is medically cleared to return to work or has exhausted the benefits of the policy.
what qualifies for long-term disability and what does long-term disability cover?
The requirements for long-term disability are often more stringent than those for short-term disability. With short-term disability, benefits may be awarded if the employee is unable to do their job. With long-term disability, benefits will generally only be awarded if the employee is unable to perform any work. what constitutes a qualifying event will be specified in the policy, so it’s important to understand when benefits may (or may not) apply before agreeing to a long-term disability policy.
Qualifying events may include chronic pain, cancer treatments, or debilitating illnesses or injuries lasting more than 26 weeks. if an employee could qualify for another form of income replacement, such as social security disability insurance, the long-term disability policy will no longer provide benefits.
When do long-term disability benefits start?
Long-term disability benefits begin after the specified waiting period and all coordinated short-term disability benefits have been exhausted. If an employer offers both short-term and long-term disability plans through a single insurance provider, the provider will generally pay the short-term disability plan up to its maximum before long-term disability payments are applied, even if the long-term plan specified term waiting period is shorter. For cases where a short-term disability policy does not apply, the standard waiting period for long-term disability policies is three months.
How long does the long-term disability last?
Once long-term disability benefits have been approved, an employee may continue to receive benefits for the term of the policy or until they return to work. Most long-term disability plans provide coverage for 36 months, although some plans may provide coverage for up to 10 years or even the life of the policyholder.
Is long-term disability taxable and how much do you pay?
As with short-term disability benefits, long-term disability benefits may be taxable depending on how the policy is funded. If the policy is paid for through pre-tax payroll deduction, the employee will likely be responsible for income taxes on any and all long-term disability benefits. the covered employee may also elect to take the tax deduction as each benefit check is processed, or may resolve any tax liability related to long-term disability benefits at the end of the tax year.
what are the long-term disability elimination periods?
The most common elimination period for long-term disability is 90 days, but the exact terms of the elimination period will be specified in the policy. If short-term disability coverage is available, the effective waiting period before receiving benefits will be relatively short. however, when a short-term policy is not available, employees may have to wait several months without income before qualifying for long-term benefits. Due to the longer elimination periods, many employees opt for a combination of short-term and long-term disability coverage.
short term disability versus long term disability insurance
The main difference between short-term and long-term disability insurance is the length of coverage. short-term policies are designed to provide benefits almost immediately for temporary disabilities, while long-term policies have a considerably longer waiting period but provide longer-term coverage for more serious illnesses or injuries. In addition, long-term coverage benefits tend to be a higher percentage of the employee’s salary, since the qualifying illness or injury has a more significant impact on the employee’s ability to earn income. Since insurance companies can potentially provide benefits for years with a long-term policy, the medical requirements are also more stringent. the employee must not be able to perform almost any type of work to qualify for benefits.
Should I buy short-term or long-term disability insurance?
Although illnesses and injuries cannot be predicted, they are likely to affect your workplace at some point in the future. For comprehensive protection, employers may consider offering a combination of short-term and long-term disability insurance to employees. These policies are an important addition to any group health insurance plan and help minimize the impact of debilitating illnesses and injuries on both your employees and your business.