Disability insurance is one way to ensure that workers can access replacement wages if they become sick or injured and cannot work. From a business owner's perspective, deciding whether or not to offer this coverage takes thoughtful review of the costs and the ways disability insurance might help attract and retain talented workers.

Only five states and one territory – California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico – require employers to carry disability insurance for employees.1 These are short-term programs, and each state determines the limitations for how much money is paid and how long the benefits can last.2 If you're an employer that isn't in those locations, it's important to understand which factors to weigh when your company is considering whether to offer disability insurance.

Understanding how disability insurance works

Disability insurance can replace some of your employees’ lost income when they aren’t able to work. Although it doesn’t cover the entire amounts of their paychecks, it pays out between 60-80% of the employees' regular monthly earnings, depending on the terms of the policy. The benefit isn't taxed as income, so the percentage may be somewhat equal to the employees' regular take-home pay.3

While workers’ compensation insurance covers employees who get hurt on the clock, disability insurance covers them when they can’t work.

There are two types of disability insurance:

  • Short-term replaces income for up to six months
  • Long-term can go beyond six months and even cover an employee until they become eligible for Social Security benefits at retirement4

What’s the connection between wealth and disability insurance

Disability insurance can make a significant difference in employees' lives. The chance of missing work as the result of illness or injury is greater than most people realize. Almost 6% of workers in the United States experience some sort of short-term disability every year – usually due to something unrelated to work.5

More than one-fourth of consumers filing for bankruptcy cite the cause of filing as medical bills. Today, only about 48% of Americans have enough money in savings to cover three months’ worth of living expenses if they're not earning income.5

Suffering some sort of disability, whether it's short-term or long-term, could be financially devastating for them. Workers who have access to disability insurance can continue saving for retirement and know that their income is at least partially covered in the event something happens to them that prevents them from working.5

Should you offer disability insurance?

While disability insurance is a valuable benefit to provide for employees, it can be costly for small business owners. Before determining if you're able to offer it, talk with providers to get an idea of the costs of plans.

If the insurance puts too much of a strain on your company’s budget, fully paying for it isn't in your best interest. That doesn’t mean that you can’t still offer access to it. You can potentially use that access as a benefit that can help attract or keep valuable employees. As an example, disability insurance covers a portion of the pay during maternity leave. That could be a determining factor in whether or not a woman chooses to take a job with your company.6

If your business can’t afford to pay for coverage, one option is to offer disability insurance as a voluntary benefit that employees can opt into and pay for themselves. This allows you to set it up for the employee to pay the premium, which gets deducted out of each paycheck. If you decide to go this route, it’s a good idea to have your insurance carrier representative or someone from your HR department explain to employees how valuable it is to have wage replacement options in the event they're not able to work.6

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