Disability income insurance provides employees with a financial safety net. It pays a benefit when they are unable to work because of an illness or injury. Maintaining an income stream is critical to help meet daily expenses when normal income stops.
Types of disability
- Short-term disability insurance (STD)
Designed to cover the more common illnesses and injuries, STD typically starts when sick leave is exhausted and provides a percentage of salary. Can be combined with LTD for a seamless coverage for more seriously disabled employees.
- Long-term disability insurance (LTD)
Designed for the more severe or catastrophic illnesses and injuries, LTD picks up where STD stops.
Things to consider
- Definition of Disability
There are various ways to qualify for disability benefits, but most group policies contain a test for loss of occupational duties or a loss of earnings, or a combination of the two tests.
- Qualifying periods
Disability benefits normally begin after a waiting period, called a qualifying period or elimination period. Short-Term waiting periods are usually defined by a number of days, such as 7 or 14. Long-Term qualifying periods are typically expressed in months, with 3 months and 6 months being most common.
- Level of Income Replacement
Disability benefits are meant to replace part of the employee's salary, not all of it. Typical benefits are normally 60% or 66 2/3% of pre-disability earnings.
Disability plans generally are limited to a maximum length of time, typically ending when an employee reaches age 65 or Social Security Normal Retirement Age. Shorter duration plans are also available, for example, 2 years or 5 years.
Group disability plans can be paid for by the employer, by the employee, or a combination of the two. The employee's tax liability for the benefit is determined by who pays the premium.
Employer-paid plans allow the employer to provide the coverage for the employees.
Voluntary programs give the employee the choice of purchasing valuable income protection at no cost to the employer other than for plan administration.
- Rehabilitation programs
Many carriers build rehabilitation plans into their disability income policies. These plans provide assistance in getting claimants back to work, helping employers retain valuable employees.