Short- or Long-Term? Which Disability Policy is Best for Your Employees?

Long-term disability coverage offers employees better financial security. Yet most workers choose short-term coverage

Can you imagine what it would do to your financial situation if you could not work for 35 months? Losing almost three years of wages would be devastating to anyone. Sadly, that’s the average long-term disability absence for American workers, according to the Council for Disability Awareness (CDA).

While it might be tempting to rush out and purchase long-term disability insurance for you and your employees, it’s important to know exactly what short-term or long-term disability insurance covers and what is the right fit for your employees.

Both short-term and long-term disability insurance will pay a portion of an employee’s salary when they suffer a disability, are ill or are unable to perform their job duties. Short-term disability protects an employee for one to six months or longer. Long-term disability protection kicks in after short-term disability payments end. Depending on the policy, an employee could receive life-long disability benefit payments from a long term plan, typically until normal Social Security retirement age.

CDA research shows that employees in their twenties have a one-in-four chance to suffer a disability before they retire. It’s also more likely that the disability will be temporary and caused by illness, rather than an accident.

Short-Term Coverage

Short-term disability insurance is a popular choice for many companies because the premiums are inexpensive.

Employees who have applied for disability benefits usually have to wait a short time before they receive benefits. The waiting period is usually up to 14 days. The payout period depends on the policy and the disability, but usually lasts from several months to one year.

While policies often cover a lengthy illness or disabling injury, the most common reason for short-term coverage is the birth of a child. If the coverage you choose includes pregnancy and the postpartum period, it usually only covers two-thirds of the employee’s salary, and benefits will typically be paid only six to eight weeks.

Long-Term Coverage

The CDA reports that the average long-term disability absence period lasts just over two years. Back injuries, cancer, poisoning, mental disorders and heart disease are the most common causes.

Long-term disability insurance covers from 50 to 70 percent of an employee’s salary whether they’re injured on or off the job. Keep in mind that worker’s compensation only pays benefits if an employee is injured on the job.

Long-term payments usually start 10 to 53 weeks after an eligible event, with the average being 26 weeks. Different policies have distinct definitions for eligible events, so it’s important you understand exactly what the policy covers. Most long-term disability policies cap how much they will pay out. The U.S. Department of Labor reports that the median maximum payout in 2014 was $2,014 per month.

To qualify for a long-term disability payment, the employee must be full-time (30+ hours per week) and must have worked for your company a certain, pre-determined time period.

The Bottom Line

In years past, companies would pay all premiums for long-term disability policies. While some companies still offer that benefit, you can choose to pay only part of the costs, or you can require employees to cover all the costs. Most plans cover 50 to 70 percent of an employee’s monthly salary. You also can pay for a basic plan and allow employees to pay extra to upgrade their coverage.

If a company covers all or some of the costs, and does not report the premium in the employees’ taxable income, the employee will be responsible for paying taxes on the benefits proportionate to the part paid by the company. The part of the benefit paid for by the employee with after-tax contributions is considered tax-free income.

Long-term disability coverage offers employees better financial security — and if purchased by the employee, not the employer, it’s portable, which employer-provided long term disability is typically not. Yet, despite the financial threat, most workers choose short-term disability coverage over long-term because of the cost. According to the U.S. Department of Labor, workers in lower paying occupations are less likely to elect coverage, and they are the ones most likely to need it. Instead, these workers usually rely on Social Security Disability Insurance.

Ideally, employees should have both types of coverage. However, if cost is an issue, then employees should buy a short-term disability policy from their employer, and, as a backup, save money in an emergency fund in case they’re unable to work.

For help setting up disability income solutions for you employees, contact USI Northeast.

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