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The Value of Disability Insurance: What It Is and Who Needs It

man in wheelchair with physical disability mobility disorder

Quick look: 1 in 4 of today’s 20-year-olds will become disabled by the time they reach retirement age, yet more than 50 million U.S. workers do not have disability insurance. These facts make it crucial for businesses to include disability insurance in their benefits packages. Doing so can open the door to financial stability for their staff and help them remain competitive as an employer. Here’s a look at the ins and outs of short- and long-term disability insurance and how a PEO can help even small companies with limited budgets access it.

When it comes to protecting the wages that support your family, the time is always now to prepare for “what ifs.” Disability insurance, or coverage that provides income if an employee can’t work due to a disability, does just that.

According to the Society for Human Resources Management (SHRM) 2023 Employee Benefits report, 67% of organizations provide short-term disability insurance, and 70% offer long-term disability insurance. However, over 50 million U.S. workers lack disability insurance besides the simple coverage available through Social Security. This is especially risky to employees and their families when considering current inflation rates, rising medical costs, increased debt, and lower emergency savings amounts. Without coverage, many workers may experience a steep decline in income if they experience injury, illness, or injury (something 5% of American employees endure each year).

Here, explore the details surrounding disability insurance policies, eligible conditions, who needs coverage, how much it should cost, and how partnering with a professional employer organization (PEO) can help small businesses offer competitively priced plans to their workforces.

What is disability insurance?

There are two types of disability insurance: short-term disability insurance and long-term disability insurance.

Short-term disability insurance protects part of a worker’s income who plans to return to work after recovery. Most short-term plans’ coverage ranges from three to 12 months, depending on state law and the individual policy. Some states (including California, Hawaii, New Jersey, New York, and Rhode Island) and Puerto Rico require employers to offer short-term disability benefits to their staff. Additionally, some plans require employees to wait up to three months before the benefits begin.

On the other hand, long-term disability insurance pays workers a larger portion of their income than short-term plans, typically between 60-80% of their salary. Coverage differs per policy but typically lasts anywhere from five years up to an employee’s retirement. Workers should note that long-term disability benefits often take a longer time to kick in, as many insurance companies require claimants to meet their specific requirements of disability for up to six months after being approved.

According to the Insurance Information Institute, disability insurance premiums are calculated according to a worker’s age, sex, occupation, and the amount of potential lost pay they’re trying to safeguard.

What counts as a disability?

Individual policies have different definitions of disability; however, some rules of thumb exist. Per the Council for Disability Awareness, the most common reasons for short-term disability claims are:

  • Pregnancy
  • Musculoskeletal disorders (back and spine, knees, hips, shoulders, etc.)
  • Physical injuries (fractures, sprains, and muscle/ligament strains)
  • Digestive disorders
  • Mental health issues

Likewise, the most frequent causes of long-term disability claims are:

  • Musculoskeletal disorders (back and spine, knees, hips, shoulders, etc.)
  • Cancer
  • Physical injuries (fractures, sprains, and muscle/ligament strains)
  • Mental health issues
  • Circulatory issues (heart attack, stroke)

Employers should clearly communicate what their short- and long-term disability insurance policies cover, any applicable waiting periods, and what constitutes earnings (some plans protect total income, including commission, while others only cover base salary).

Who needs disability insurance?

Most people don’t expect to face a disability, and many are financially unprepared to go without income for an extended period—over half of Americans don’t have an emergency fund, and 40% of those who do have less than $10,000 in it. Meanwhile, approximately 1 in 4 of 20-year-olds will become disabled and eligible for Social Security disabled worker benefits before turning retirement age of 67 years old.

In other words, many employees can benefit from having some form of disability insurance coverage, as going without it can cause them and their families to face substantial hardship. While the majority of employers include short-term disability into their benefits packages, experts recommend that all workers, regardless of their age or income, opt into long-term disability coverage. Doing so can even be valuable to staff approaching retirement age since many long-term policies offer coverage for at least one additional year after retiring.

Is disability insurance worth it? (yes!)

Disability insurance coverage can provide great value to both organizations and their employees.

Purchasing coverage is a personal choice, and workers should examine the risks associated with their occupation and health. But generally, it’s wise to expect the unexpected. If it makes financial sense, it’s better to have coverage if you happen to become disabled.

Some employers may provide short-term disability insurance at no cost to the employee. However, even if someone must pay for their coverage, it’s worthwhile in many cases. According to financial advisors, typically, a policy purchased through employer-sponsored benefits costs between 1-3% of a worker’s standard income—and if it costs more than that, it may not be worth it.

Individuals may also buy private policies on their own, but those often are more expensive as plans made available through an employee benefits package have premiums that the employer partially pays.

Additionally, there is a tax benefit associated with disability insurance payouts. Since employees may pay their premiums with after-tax dollars, during tax season, they won’t owe taxes on any disability benefits they have received. 

From an employer’s perspective, including short- and long-term disability insurance in an employee benefits package is crucial. Recruiting and retaining top talent remains a top priority for organizations, and current staff and jobseekers are closely examining their company or potential company’s benefits as inflation continues to stretch their wallets thin. Including more than the standard medical, dental, and retirement plans is now a must.

Providing peace of mind is easier with a PEO

By offering short- and long-term disability insurance, SMB employers can help employees and their loved ones gain financial stability, even if tragedy strikes. And while bigger companies may have more resources to spend on providing coverage, PEOs can assist small businesses in adding it to their benefits packages.

Entering a PEO’s umbrella plan gives SMBs access to large-group pricing tiers they otherwise wouldn’t be able to access on their own. Leveraging this economy of scale can reduce the cost to both employers and their staff, enabling more hardworking individuals to experience financial peace of mind.

For example, ExtensisHR, a nationwide PEO, offers both short-term and long-term disability insurance plans, enabling small employers to provide financial protection to employees and their loved ones in the event of a covered disability. Additionally, ExtensisHR’s white-glove PEO Premier® solution provides long-term disability insurance with increased limits for high-earning executives.

ExtensisHR also provides other benefits services, including planning, administration, management, and compliance expertise, in addition to access to a full portfolio of the most in-demand employee benefits, including:

ExtensisHR can help your small business achieve a robust range of benefits to improve your employees’ physical, mental, and financial well-being—and strengthen your position as an employer. Contact us today to learn more.

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