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Insurance offered through OnPay Insurance Agency, LLC (CA License #0L29422)
Updated: May 13, 2023
Over 35% of employers offer disability insurance coverage to their employees in some shape or form, according to data from the Bureau of Labor Statistics. Many companies adopt these plans because it’s inevitable that staff will get sick or need time off for reasons out of their control (whether or not it happens on the job). Not only can both short-term and long-term disability provide temporary income for employees, but it also provides peace of mind for staffers who might worry about an extended absence from the workplace (and what it means for their paycheck).
In this article, we’ll explore both types of disability coverage, their pros and cons, and some insights from a licensed insurance broker, so you have all the information you need to make the best decision for you (and your employees).
Most employers provide disability insurance to their employees so that they can have some income if they become ill or are unable to work due to a life event that occurs while they are not on the job.
Long-term and short-term disability coverage are the two main types of group disability coverage that most employers are familiar with (and use).
The option of long-term disability (LTD) provides monthly payments in the event an employee becomes disabled and is unable to work for an extended period of time — usually for a period lasting more than six months.
On the other hand, short-term disability (STD), sometimes referred to as “sick pay” provides a much shorter period of coverage. For example, it generally covers an employee for any downtime lasting between a few days and up to six months.
The short of it
Though short-term disability is not a requirement in every jurisdiction, there are some states that mandate coverage, including California, Hawaii, New Jersey, New York, and Rhode Island (and Puerto Rico does as well).
The long of it
Though no laws exist that require employers to offer long term disability insurance, per the Insurance Information Institute, roughly half of employers choose to offer it to their employees in some shape or form (this is specifically from the study the III conducted).
Yes, in most cases, employers and business owners can add themselves to their company’s group disability insurance policy. Keep in mind that when doing so, policy premiums are likely to rise as a result of:
Next, let’s take a look at how coverage periods differ if you decide to offer employees access to coverage.
Employers will most likely want to know what kinds of life events typically qualify for short-term disability insurance coverage (in order to properly communicate its value to their employees). Here are some.
Illness: If an employee should become ill (with a condition like COVID-19) that prevents them from completing work, short-term disability should cover them in most cases, especially if it requires prolonged treatment or recovery. So if the employee only has a limited amount of paid time off (PTO), STD kicks in afterward (so the employee gets paid).
Injury/accident: There might be times when injuries suffered off the job are eligible for coverage. Short-term policies kick in when a non-work-related accident or injury occurs.
Pregnancy and childbirth: Short-term disability insurance may provide coverage for workers who are unable to work due to pregnancy-related complications or recovery from childbirth.
Surgery plus recovery: Does an employee need time to recover from surgery? Short-term disability insurance may provide coverage during that period.
Mental health: In some situations, short-term disability insurance may provide employee coverage if someone is unable to work due to mental health conditions, like severe anxiety or depression.
Non-work-related accidents: Was your employee injured in a non-work-related accident? In some cases, such as an auto accident, short-term disability insurance may provide coverage during the recovery period.
Now that we’ve gone over what’s typically covered, let’s talk about how long the benefits typically last.
A key difference between these two types of coverage is how long your employees will receive benefits when they are not working.
The benefit period for short-term disability usually covers a smaller window of time, providing income replacement that usually lasts between 3 and 6 months (and the waiting period can be as short as one to 14 days).
Benefit amounts typically range from 50% to 60% of the employee’s income, and the costs are generally higher. Short-term disability insurance is often available through employer-provided plans.
On the other hand, long-term disability insurance is designed to provide income replacement for a longer period of time, which in some cases can be several years or up to age 65. With long-term coverage, the “elimination period,” also known as the waiting period, is typically 90 to 180 days (we cover the elimination period in more detail below).
Benefit amounts are typically up to 60% to 70% of the employee’s income, and the costs are generally lower than long-term disability insurance. It is often available through employer-provided group plans or individual disability income policies (DI). Even though this article goes into detail about group coverage, we should take a moment to explain what individual disability income, or DI, is.
A note on individual disability income policies (DI)
Although obtaining coverage can be more complicated, individual disability income insurance also replaces lost income in the event that an individual becomes disabled (and is unable to work) due to an off-the-job event.
For example, the employee who is being covered will have to go through underwriting and, depending on the wage and income being protected, may have to take a physical exam. DI is often used by the owner of a business, and some companies offer it to certain high-level employees as a perk.
Information your agent will ask for
Whether it’s a group or DI policy, to determine what the benefits will be, your agent (or broker) will usually want to know:
With more information on benefit periods under our belts, let’s look at elimination periods and what they’re used for.
No, it is important that employers understand that these are different things!
As we mentioned earlier, an elimination period is another way to describe what is traditionally known as the benefits waiting period in a long-term disability insurance contract. To learn more about how this affects workers, we spoke with OnPay’s Vice President of Insurance, Paul Foery. “The elimination period is a waiting period that an employee must fulfill before filing a claim for disability benefits,” he explains. “If the claim is valid, the carrier determines if the worker will receive any income replacement — after paying out of pocket — for expenses they have incurred outside of the workplace.”
Foery also explains that the length of each elimination period depends on whether the benefits are short-term or long-term. “Usually, an elimination period for long-term disability insurance lasts 90 days or more, while a short-term policy can be as short as seven days.”
“The elimination period is a waiting period that an employee must fulfill before filing a claim for disability benefits. If the claim is valid, the carrier determines if the worker will receive any income replacement — after paying out of pocket — for expenses they have incurred outside of the workplace.”
— Paul Foery, OnPay's Vice President of Insurance
For an employer, the choice can impact their business’s bottom line and how long their employees have to wait before being compensated by the insurance company. One of the things that can affect how much an employer’s premium will cost is the choice of an elimination period. For example, with a shorter elimination period, the window for an employee to submit a claim takes less time (but costs the employer more).
That said, if an employer chooses a long-term disability plan, the waiting period (or elimination period) can last longer than 90 days. This means the employee waits a bit longer to make a claim, (which usually means less of an investment for the employer). Though there are many variables to consider, long-term disability plans simply have lower premium costs, and the elimination period makes a big difference in the numbers.
Every company has different goals, and there are a variety of things to consider when selecting an elimination period. We asked Foery once more for his thoughts on what business owners should keep top-of-mind when making decisions. “Many employers should consider the following: how frequently employees are at risk of being injured off of the job; a budget they are comfortable with; and, in many cases, their decision-making should take into account the stage of life their employees are in,” he explains.
For example, if an employer’s workforce skews younger, it could mean there will be an uptick in pregnancies (and more staff taking maternity leave). Since maternity leave qualifies for short-term disability, it can also impact decisions.
Now that we’ve had a chance to explain what an elimination period is, let’s break down the benefits and drawbacks of each type of disability coverage.
“Many employers should consider the following: how frequently employees are at risk of being injured off of the job; a budget they are comfortable with; and, in many cases, their decision-making should take into account the stage of life their employees are in.”
— Paul Foery, OnPay's Vice President of Insurance
Like many business decisions, it’s a good idea to weigh both the advantages and disadvantages of disability coverage before moving forward with a plan. Below are some items to consider, from both the employer’s and employee’s perspectives.
Adding short or long-term disability insurance to your list of benefits can make a real difference in protecting your employees. Whether you opt for short-term or long-term coverage (or both), it can make sense to research different providers and shop around to find the best plan for your needs (and those of your employees). With the right coverage in place, you can rest easy knowing that your employees are taken care of in the event of illness or injury.