Are Small Business Owners Required To Provide Disability Insurance
Disability insurance for small businesses is not normally a government requirement. However, businesses that operate in California, Hawaii, New Jersey, New York, or Rhode Island are required to provide employees with short-term disability insurance.
If you have employees, most states require you to carry workers compensation insurance, which provides benefits for work-related disabilities. Workers compensation requirements vary by state.
Best For Long Coverage Period: State Farm Insurance
Why we chose it: Offering up to a three-year benefit period, State Farm Insurance offers some of the longest coverage periods we reviewed.
Benefits periods include one to three years
Touts easy-to-fill-out application and online claims submission
Does not offer disability products in Massachusetts, Rhode Island, or New Jersey
Does not provide benefits for uncomplicated pregnancy or childbirth
State Farm offered some of the longest benefit periods we saw available for short-term disability insurance, as many companies only offer up to one year. While the maximum monthly benefit is policy-dependent, the amounts can range from $300 to $3,000, depending on your income and occupation. Their advertised elimination periods include 30, 60, or 90 days and are based on the policy, but they do not list renewability periods on their website.
State Farms exclusion list contains several common exclusions . However, they also list several notable exclusions, including normal pregnancy and childbirth and when an illness or injury results from cosmetic surgery.
In terms of financial stability, State Farm has an A.M. Best rating of A++ . They offer short-term disability insurance in all states except three: Massachusetts, New Jersey, and Rhode Island.
Can You Keep Your Coverage If You Leave Your Job
One of the big drawbacks of group disability insurance is that you typically cant keep your coverage if you leave your job. However, some employers offer the option to convert group coverage to individual coverage if you leave your job, Olmstead says.
Group coverage thats converted to individual coverage typically doesnt provide the same level of benefits you could get if you had bought a policy on your own, Olmstead explains. But it might be your only option if you have medical conditions that prevent you from qualifying from individual disability insurance.
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What Is A Long Term Group Disability Plan
Long Term group disability plans pays a part of the employees salary. The employer determines the benefit. The benefits start paying between 90 days and 1 year of the employees illness or injury. Benefits pay for 2 years or more. Some plans reduce the benefit by social security disability benefits.
For the employer, offering group long term disability plans is a tool to keep employees. When offered, it is worth spending some time educating employees on the risk of disability.
Offering Employee Benefits Can Be Cost Effective
You might be wondering why you shouldnt simply pay employees a larger salary instead of offering employee benefits. This way, employees can buy whatever benefits they want on their own and the employer doesnt have to deal with it. For example, if an employer spends $10.72 per hour per employee on benefits the average in September 2020 why not cut the benefits and give employees a raise of $10.72 an hour?
This sounds simple, but it is not necessarily the most cost-effective strategy.
First of all, employee benefits can come with some tax advantages. For example, employee benefits are typically tax deductible. Compensation provided through employee benefits may be exempt from Social Security and Medicare taxes, depending on the type of benefit. When reviewed from a tax perspective, offering benefits instead of increasing salary can make financial sense.
Group benefits can also help your entire team get more for their money, with easier underwriting requirements. It often costs more to secure benefits on your own that it does to pay for benefits provided by a group health plan.
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Group And Individual Disability Insurance
Chip Stapleton is a Series 7 and Series 66 license holder, CFA Level 1 exam holder, and currently holds a Life, Accident, and Health License in Indiana. He has 8 years experience in finance, from financial planning and wealth management to corporate finance and FP& A.
Integration With Other Benefits
Employer-provided long-term disability plans usually integrate benefits with Social Security Disability Insurance . This means the group disability benefit you receive may be reduced dollar for dollar by other benefits received. Individual long-term disability policies vary by company, and benefits may not be subject to a reduction if you receive SSDI. The policy premium would be higher, but your combined income if you become disabled would be the combined benefits. Usually, individual plans covering blue-collar and high-risk occupations integrate with SSDI.
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Can Other Benefits Be Deducted From My Long Term Disability Payment
Yes, most long term disability policies typically have provisions which reduce the monthly payment you receive by accounting for:
- Benefits payable from any Workers Compensation plan, including Workplace Safety Insurance payments
- Disability benefits received under any other government program such as, Canadian Pension Plan- Disability, Ontario Disability Support Program, Employment Insurance- Sickness Benefits, etc.
- Income from the Criminal Injuries Compensation Act
- Wages or remuneration payable from, any employer, including any statutory or common law termination and/or severance pay
Consult your policy for specifics as your long term disability benefit may also be reduced by monies payable to your dependents for the aforementioned areas.
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Understanding How Disability Insurance Works
Disability insurance can replace some of your employees lost income when they arent able to work. Although it doesnt 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 cant 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
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How We Chose The Best Disability Insurance
We compared more than 15 disability insurers before picking the best for each category. In doing so, we compared not only the products offered but also pricing, the ease of getting a quote and then buying coverage, options for benefits, and how quickly coverage would kick in .
Of course, it was also important to choose insurers with a strong history of claims satisfaction, trusted coverage, and financial stability. We looked at data from the NAIC, BBB, and AM Best in that analysis.
Am I Required To Provide My Employees With Short
Short-term disability insurance provides some income replacement when a non-work-related illness or injury leaves an employee unable to work for a limited time period. Long-term disability insurance serves the same purpose, only for longer periods of time, ranging from two years to retirement age, depending on the policy.
No law requires employers to offer long-term disability insurance to employees. However, five states and Puerto Rico have short-term disability insurance requirements. Those states are California, Hawaii, New Jersey, New York, and Rhode Island.
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How Do I Choose Disability Insurance
There are many factors to consider when choosing a disability insurer. If your employer offers a group short- or long-term disability insurance option, that may be an affordable option to consider. Of course, you can also purchase individual and/or supplemental coverage on top of that, to further protect yourself and your income.
When choosing a disability insurance policy, youll want to look at the elimination period options, benefit coverages offered, available riders, and whether the policy is non-cancelable. In some cases, you might also want to consider whether a medical exam will be required and if you can buy coverage online or if youll need to chat with an agent.
Regular Or Own Occupation
The definition of “regular or own occupation” plan means you’ll receive benefits if you’re unable to perform the main duties of the job you had at the time the disability started.
You’ll still receive benefits even if you can work in a different job from the one you had before your disability, based on your training, experience and education. Some policies don’t allow you to get benefits, or may reduce your benefits, if you begin working in a different job.
In group policies, it’s common that policies have regular or own occupation plans for a specified period of time. At the end of the specified period of time, usually after the first 2 or 5 years, the disability policy will often change to the any occupation definition.
Own occupation plans that never change in definition are often purchased individually and usually cost more than any occupation plans.
You may want to consider an own occupation plan if you have a specialized occupation that would require you to take a significant pay cut in order to work in another field.
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The Cost Of Disability Insurance For Employers
The disability insurance policies you can choose and how much you pay for them vary depending on your businesss industry, among other factors. Costs for coverage are affected by the perceived risk of employees in your industry and the stability of the workforce.
According to the Bureau of Labor Statistics, short and long-term insurance plans generally cost $0.15 per employee, per hour worked on average. This works out to a premium cost between 1% and 3% of an employees total compensation. Monthly premiums how much you and/or employees pay for the policy range from about $25 to $600, but this varies depending on many factors.
To determine pricing and coverage limits for these policies, disability insurance providers group jobs into specific occupational classes taking into account the hazards of the job and typical risk profile. Much of this figure is based on the historical claim experience associated with certain professions. However, the size of your business generally will not change the cost of disability insurance for employers. All else equal, a small business owner is often subject to the same rate as a large enterprise. The rate is made up of many factors that include loads and discounts.
Of course, employers take many different approaches to benefits and the insurance policies dictating them. Some businesses cover disability insurance premiums in full, while others ask employees to contribute a small portion to participate.
What Types Of Disability Insurance Are There
Short Term Disability Insurance provides temporary income replacement if you are unable to work due to a medical condition . Usually this policy only covers income replacement for the first 120 days. Short term disability insurance benefits are usually purchased by employers for their employees
Long Term Disability Insurance offers a form of income protection in the event that an illness or disability leaves you totally or completely unable to return to work. It provides you with a portion of your income that can go towards living expenses which may also include medical treatment and rehabilitation. For the first two years if you are unable to meet the requirements of performing your own occupation then you are eligible. After two years you must be unable to perform the tasks required by any occupation for which you are reasonably qualified, or could become qualified for, by reason of education, training or experience, in order to retain long term disability benefits.
Disability Mortgage Insurance provides you with financial support in the event that you become disabled and are unable to work. This policy covers all or part of your mortgage payment up to a certain amount bi-weekly or per month. There is typically a 60 day waiting period before you can receive benefits. There are also limitations in regards to duration and the amount of coverage that will be given.
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What If Youre Still Not Ready To Go Back To Work
If youre on short-term disability, your benefits will end when your predetermined time period is over or when you return to workwhichever comes first. But what if youve already maxed out your short-term disability benefits and you still cant head back into the office?
Lets return to our example of missing out on work for major back surgery. Your doctor determined that youd need six months to fully recover, and your short-term disability plan approved you for that amount of time.
However, you had some pretty significant complications with your surgery and your recovery. As the end of those six months draw near, its evident that you arent physically capable of sitting at a desk for eight hours each daythis is a problem that will plague you for a lot longer, perhaps even permanently. Now what? Are you just out of luck?
If you have long-term disability benefits, it should be straightforward enough to transition into those benefits if you meet the new definition of disability for your long-term plan. The definition for disability under a long-term plan is typically subtly different than the definition for short-term disability.
Some insurers require new paperwork from the claimant and new medical records before they will begin paying a long-term disability benefit, says McDonald.
What Counts As A Disability
There isnt one standard definition for a disability that applies across the board here.
Its all plan- or policy-specific, says Chicago-based attorney Michael Bartolic, whose firm focuses on employee benefits and deferred compensation. As a general observation, its any sort of injury or illness that renders one unable to do their job.
That could include things like childbirth, a major surgery with a long recovery period, an illness that requires frequent treatment, or an injury sustained in some sort of accident. Bartolic explains that the best thing to do is to check your plan documents, as the definition of disability should be clearly spelled out there.
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What Does Disability Insurance Cover
There are two types of disability insurance: short-term and long-term.
Short-term disability insurance covers a portion of an employees salary for a short period of time. The length of time varies from policy to policy, but typically covers three to six months after the incident that qualified them as disabled. Long-term disability insurance, meanwhile, is used when the policyholder is disabled to where they are unable to work for more than six months.
Importantly, disability Insurance does not cover work-related injuries. Workers compensation insurance is used instead for accidents occurring on the job or work-related illnesses.
Disabilities from sickness and illness triggering coverage generally include chronic conditions like cancer, heart disease and back problems, along with off-the job injuries and, sometimes, pregnancy. Pregnancy coverage is an important benefit if your business expects to offer paid maternity benefits, as short-term disability partially compensates leaves of absence due to childbirth.
If your business offers or plans to offer disability insurance, you should familiarize yourself with the Employee Retirement Income Security Act . These federal regulations, along with state guidelines, dictate how disability claims are made and what standards your group insurance policy must meet.
What Qualifies For Short
To qualify for short-term disability benefits, an employee must be unable to do their job, as deemed by a medical professional. Medical conditions that prevent an employee from working for several weeks to months, such as pregnancy, surgery rehabilitation, or severe illness, can qualify to receive benefits. Since employers in most states must legally provide workers’ compensation insurance to all employees, any injuries incurred on the job are typically covered under a workers’ comp policy and are therefore not eligible for short-term disability.
While most non-work-related temporary medical conditions are covered by a short-term disability policy, there can be exclusions for preexisting conditions or intentional and foreseeable injuries . While employees can qualify for time off under the Family and Medical Leave Act 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 illness.
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How Alex Can Help
Understanding the complexities of short- and long-term disability isnt always easy. ALEX is here to help you explain the differences to your employees. Backed by behavioral science, ALEX helps employees understand all their options and make an educated decision on their benefits. In fact, 85% of users say ALEX helped them better understand tax savings related to their benefits choices.
Find out how ALEX boosts benefits understanding and saves you time and money.
Do You Need Individual Coverage In Addition To Group Disability Insurance
The answers to the questions above will help you determine whether you should buy your own disability insurance in addition to what your employer offers. It also depends on your current financial situation, Olmstead explains.
If youre just starting out, you might not have excess cash flow to buy an individual policy if your employers plan has gaps. But Olmstead says that if you have a high income and couldnt live on the payout youd get from your group plan, you should consider looking at supplementing your coverage with an individual policy.
The most flexible and reliable source of coverage is an individual disability insurance policy that you purchase on your own, says Faisa Stafford, president and CFO of Life Happens. A privately owned policy is portable, meaning you wont have to worry about losing coverage if you change jobs. Plus, when you pay the premium with after-tax dollars, benefits are received income tax-free.
You can find out how much coverage you need with Life Happens free disability insurance calculator.
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