Disability Insurance
Disability insurance is a financial safeguard designed to provide income protection for individuals unable to work due to injury, illness, or disability. There are two main types: short-term and long-term disability insurance. Short-term disability insurance offers benefits for a limited duration, typically up to six months, covering non-work-related injuries or illnesses after an employee's sick leave is exhausted. Long-term disability insurance kicks in when short-term benefits end, providing support for a longer period, potentially until the individual reaches retirement age.
These insurance plans generally pay a percentage of the worker's earnings, with short-term benefits often pegged at about 60% of the employee's pay, while long-term benefits are based on the employee's annual salary. Disability insurance can be obtained through employer-sponsored group plans or purchased as individual policies, with the former being the more common option. Coverage gaps exist, particularly for workers in lower-income brackets and service occupations, who are less likely to have such insurance. For those without adequate coverage, financial instability can arise, leading to significant hardships. Additionally, government programs like Social Security Disability Insurance (SSDI) exist, but they come with strict eligibility criteria and lengthy application processes. Overall, disability insurance plays a crucial role in providing financial stability for individuals facing unexpected health challenges.
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Subject Terms
Disability Insurance
Disability insurance provides income protection for individuals who are unable to work due to injury, illness, or disability. Short-term disability insurance provides benefits when workers are absent from work due to illness or injury and have exhausted all allowable sick days. This insurance covers absences of limited duration, typically up to six months. Long-term disability insurance usually picks up when short-term disability benefits end and provides benefits for workers unable to work for either a set number of years or until they reach full retirement age, which varies from age sixty-five to sixty-seven, depending on date of birth. Neither short- nor long-term disability insurance provides benefits for work-related illnesses or injuries. Nor do either provide benefits for individuals who have not been a part of the workforce.
Disability insurance benefits provide cash based on a percentage of a worker’s earnings. Short-term disability benefits pay a percentage of the worker’s current wage. Long-term disability benefits pay a percentage of the worker’s annual earnings at the time disability started. Long-term disability benefits may include job training and other assistance in addition to cash.
Disability insurance is available through an employer’s group plan or special groups or associations, or purchased as an individual policy. Employer-provided disability insurance is the most common way individuals obtain disability insurance, with such plans being offered at no cost, partial cost, or full cost to the employee. Some employees purchase individual disability insurance to complement employer-provided plans or to provide coverage when employers do not offer disability insurance.
Background
Employer-provided insurance plans are a benefit many employers provide to their employees. The Bureau of Labor Statistics (BLS) reported that in 2014, 39 percent of private industry employees were covered in group employment plans for short-term disability insurance and 33 percent had long-term disability insurance. Workers in management and professional occupations had the highest rates of participation in employer-provided disability insurance programs, while workers in service occupations, such as restaurant workers and hair stylists, had the lowest. A much smaller number of workers were covered by individual insurance plans.
While more than 50 percent of managerial and professional employees are covered by employer-provided short- and long-term disability insurance plans, the majority of sales, office, service, production, and transportation workers are not. Uninsured workers in all occupations are at risk for being unable to meet their rent or mortgage payments and other expenses if they become unable to work. The loss of income forces many uninsured workers who become disabled to deplete their savings and/or sell their houses and move in with families or friends while waiting for government disability benefits to begin, if they are even eligible for those benefits.
According to the BLS, high numbers of uninsured workers in the lowest income brackets, especially service workers, become disabled and unable to work each year. With no income protection and little savings, they often are unable to pay for housing, food, and transportation. Many apply for government disability insurance benefits but have little means of support while waiting for benefits to begin.
The BLS statistics show that the number of people receiving disability benefits through the Social Security Disability Insurance (SSDI) program doubled between 1990 and 2012, with almost 8.8 million adults receiving SSDI benefits in 2012. This put a serious strain on the trust funding the program, jeopardizing the future of a government program that provides disability benefits to persons who do not have disability insurance coverage through their employers or individual policies.
Overview
Disability insurance may be either short term or long term. Short-term disability insurance is sometimes known as "sickness and accident insurance." It provides cash payments to employees who are unable to work due to a non-work-related accident or illness. Most short-term disability benefits are a fixed percentage of the employee’s pay, while a small number of programs offer full pay. This type of insurance is intended to provide financial benefits to employees who are unable to work for a short duration of time and typically lasts no longer than six months. According to the BLS, the median salary replacement for short-term disability in 2014 was 60 percent of the employee’s pay, with the majority of short-term insurance plans including a maximum benefit amount.
Long-term disability insurance provides cash payments to replace part of the salary of an employee who is no longer able to work due to illness or injury not related to work. Benefits are provided for an extended period of time. Depending on the insurance policy, benefits may be paid for predetermined number of years or until the insured person reaches retirement age, as designated by the Social Security Administration. Coverage ends if the disability ends and the person is able to return to work. Benefits are paid at a percentage of the disabled person’s annual salary at the time the benefit period started. The BLS reports that the median salary replacement rate for long-term disability in 2014 was 60 percent of the employee’s annual earnings, with 88 percent of plans capping the total benefit payout.
Uninsured workers may be able to receive disability payments through a government program, SSDI. The requirements for this insurance program are more stringent than those of private insurance plans, and SSDI requires a lengthy application process and long wait time before benefits are received. Some long-term disability insurance plans require recipients to apply for SSDI. Any benefits that are received through this program are then deducted from the benefits paid under the insurance plan.
Disability insurance plans vary based on their provisions. The following factors influence the benefits and cost of insurance: benefit amount, waiting period (or elimination period), benefit period, eligibility requirements, extent of disability, cost-of-living adjustment, and return-to-work programs.
The benefit amount is the amount a policy will pay a person who becomes disabled, or unable to work due to illness or injury unrelated to work. Plans that pay a higher percentage have higher premiums.
The waiting period, or elimination period, is the length of time a person must wait before receiving the first benefit payment. While many long-term disability benefits start when short-term benefits end, some policies require a waiting period of one to six months.
The benefit period is the length of time benefits can be received. For short-term disability, the maximum duration is usually six months. For long-term disability, the duration may be a set number of years or until the person reaches retirement age.
Eligibility requirements refer to the policy’s definition of disability. While many plans consider a disability an illness or injury that prevents a person from being able to work, some plans cover only disabilities caused by accidents. Plans also differ in how they define the inability to work. Some plans define this as the inability to work at the same occupation, while others consider it the inability to work at any occupation.
Extent of disability refers to whether a person is fully and permanently disabled or has a partial and/or temporary disability. Insurance plans that pay benefits to policyholders who have a partial or temporary disability generally have higher premiums than those that only pay benefits for a person who is totally disabled.
Cost-of-living adjustment is an adjustment made to the benefit amount based on inflation. Insurance plans that include this provision are more expensive than other plans.
Return-to-work programs are a feature that provide assistance, such as job training and counseling service, to help a person learn a new occupation or prepare to return to work.
Disability insurance provides a financial safety net to workers who are unable to work due to a disability. This allows them to have some incoming cash to pay bills, such as a mortgage or rent, food, and utilities. Without this money, many employees who become disabled would face financial uncertainty and would need to deplete savings or sell assets, such as their home, to survive. For people without savings or saleable assets, the consequences could be even more dire. They may lose their homes and be forced to live with family or friends, in a car, in a homeless shelter, or on the streets. While the government offers a social security disability program for disabled people, the requirements are strict and the waiting period lengthy. This may exclude people whose disabilities are expected to keep them out of the workforce for an extended period but not permanently. It also creates a gap when the uninsured individual has no cash flow to pay expenses.
Individuals who are not offered disability policies through their employers may purchase individual policies through an insurance agent. These policies are much more expensive than group insurance. They also require individuals to meet eligibility requirements and may deny an applicant based on a pre-existing condition. This contrasts with employer-provided disability plans that generally accept any applicant during the open enrollment period.
Whether obtained through an individual or employer-provided policy, or a combination of the two, disability insurance provides some income protection and relief when workers experience illness or injury that prevents them from working.
Bibliography
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Bureau of Labor Statistics. "How Extensive Is the Employer-Provided Safety Net? BLS Looks at Life and Disability Benefits." BLS Program Perspectives 2.7 (2010). Digital file.
Consumer Federation of America. "Long-Term Disability Income Insurance: Financial Protection for You & Your Family." CFA. CFA, n.d. Web. 11 June 2015.
Ebeling, Ashlea. "5 Myths about Disability Insurance." Forbes. Forbes.com, 24 Sept. 2013. Web. 11 June 2015.
Hyde, Serah. "Is Disability Insurance Used as a Form of Extended Unemployment Insurance?" Monthly Labor Review. US Bureau of Labor Statistics, Nov. 2014. Web. 16 June 2015.
Lieber, Ron. "Looking Out for Yourself with Disability Insurance." New York Times. New York Times, 12 Sept. 2014. Web. 11 June 2015.
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