Disability Insurance

 

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Disability income insurance insures the beneficiary’s earned income against the risk that the disability creates a barrier for a worker to complete the core functions of their work.  It encompasses paid sick leave, short-term disability benefits, and long-term disability benefits.  Currently, it is estimated that nearly 18.5% of Americans are currently living with a disability, and 1 out of every 4 people in the US workforce will suffer a disabling injury before retirement.

  • Individual disability insurance is for those whose employers do not provide benefits, and self-employed individuals who desire disability coverage.  Premiums and available benefits for individual coverage vary considerably between companies, occupations, states and countries.  Generally speaking, premiums are higher for policies that provide more monthly benefits, offer benefits for longer periods of time, and start payments of benefits more quickly following a disability claim.
  • High-limit disability insurance is designed to keep individual disability benefits at 65% of income regardless of income level.  Coverage is typically issued supplemental to standard coverage.  With high-limit disability insurance, benefits can be anywhere from an additional $2k-$100k per month.
  • Key-person disability insurance provides benefits to protect a company from financial hardship that may result from the loss of a key employee due to disability.  The company can use the benefits to hire a temporary employee should the disabled employee’s disability appear to be short-term.  In the case of a permanent disability, benefits are used to help defray costs related to hiring a replacement, including recruitment, training, startup, loss in revenue and unfunded salary continuation costs.
  • Business overhead expense (BOE) disability insurance coverage reimburses a business for overhead expenses should the owner experience a disability.  Eligible benefits include: rent or mortgage payments, utilities, leasing costs, laundry/maintenance, accounting/billing and collection service fees, business insurance premiums, employee salaries, employee benefits, property tax, and other regular monthly expenses.
  • Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) are programs that provide a floor beneath all other disability insurance.  In essence, they are the safety net that catches everyone who was otherwise uninsured or underinsured.  In addition to the federally funded programs, California offers state funded disability insurance.  The state program is designed for short term disabilities only and coverage amount is determined by the applicant’s level of income over the previous 12 months.
  • Employer-supplied disability insurance (Workers’ compensation) –  One of the most common reasons for disability is on-the-job injury, which explains why the second largest form of disability insurance is that provided by employers to cover their employees.  Workers’ compensation (workman’s comp, workmen’s comp, worker’s comp) offers payments to employees who are temporarily unable to work because of a job-related injury.
  • Short term disability insurance (STD) coverage typically starts anywhere from 1 to 14 days after your employee suffers a condition that leaves them unable to work.  Many times, employees are required to use sick days before short term disability kicks in, if it’s an illness that keeps them out of work for an extended period of time.  This is why there is usually a different policy for short term disability for sickness versus an injury.  The duration of short term disability benefits are typically between 10 to 26 weeks.
  • Long term disability insurance (LTD) begins to assist the employee when the short term disability insurance benefits end (generally after three to six months).  LTD pays an employee a percentage of their salary, typically 50-70%.  Some estimates state that the average employee with a LTD misses 2.5 years of work.  Some plans only pay out 5-10 years worth of disability to anyone qualified, while others will pay out till age 65.  LTD is usually provided by employers, and there are a variety of different plans available for employers to offer as a part of a comprehensive employee benefits package.  Payments to an employee from their employer’s long term disability insurance are taxable income whereas payment from an employee purchased plans are usually not.

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