A quarter of all 20-year-olds will become incapacitated and unable to work before they turn 67, according to the Social Security Administration. Very few individuals are aware that there are insurance policies that can replace a portion of their income in the event that they become ill or incapacitated and are unable to work, in contrast to medical, dental, and vision insurance.

What Is Disability Insurance?

Disability insurance is, as the name suggests, insurance provided in the event that an employee is disabled and cannot work. Unlike workers’ compensation insurance — which provides benefits like partial wage replacement if employees get hurt at work — disability insurance provides partial wage replacement when employees become ill or disabled away from work, and therefore can’t work.

In essence, health insurance benefits enable employees to seek needed medical care. Disability insurance replaces a portion of employee income when they can’t work because of an illness or disability.

For the most part, disability insurance will not replace all of someone’s income. Instead, disability insurance provides wage replacement benefits that cover, on average, up to 60% of employee earnings. Those payments usually go up to a cap, or a maximum monthly payout. Although that’s not ideal, receiving up to 60% of wages is still better than 0% — and having that income stream can be very important to an employee and their family.

Long-Term vs. Short-Term Disability Insurance

There are two types of disability insurance: short- and long-term. Short-term disability insurance  typically pays out a portion of an employee’s income from nine to 52 weeks depending on the plan. Short-term disability benefits generally kick in after a waiting, or “elimination” period, which is usually set from seven to 14 days.

Often, employees will use accrued sick time or PTO time during this waiting period. Under certain circumstances, there will not be a waiting period. The applicable plan document should provide information about a waiting or “elimination period.”

Long-term disability picks up where short-term disability leaves off. Long-term disability insurance usually provides about 50-60% of an employee’s base wages. Long-term disability benefits are paid out for the number of years indicated in the plan document. There are long-term disability plans that pay partial wage replacement benefits until a certain age, such as 65 years old.

Some private companies offer both short-term and long-term disability insurance plans, whereas others leave people to buy plans as an individual.

Should Your Company Offer Disability Insurance?

There are some states that have state-mandated disability insurance requirements so you’ll need to see what is required in your area. If you have employees in one of those states, it is important that you understand how to comply with the law.

What about if you aren’t required to offer disability insurance? Should you?

It depends. It’s an additional cost to your business and if you can’t afford it, it’s obviously not a good idea. However, should your business be able to afford it, the benefit might act as an additional motivator to attract and retain skilled, talented employees, especially for small businesses. For example, disability insurance covers part of women’s pay during pregnancy and maternity leave.

Employees that want to take time off for pregnancy or a new baby need to consider what is actually covered by these policies. For example, a short-term disability insurance policy will only pay benefits if you are disabled due to the pregnancy. The typical timeframe that you’re considered disabled following delivery of the baby, without complications, is six weeks; eight weeks if a C-section was performed. Benefits may be paid before the delivery of the child if your doctor has put you on bedrest due to the pregnancy.

However, let’s say your business can’t afford it. You may offer STD or LTD as a voluntary benefit. This means you’ll facilitate the purchase of the insurance, but the employees are responsible for paying the entire premium. This small amount of money will be pulled out of the employee’s paycheck to cover the cost of the insurance premium.

If you decide to offer disability insurance, let employees know how important wage replacement can be if they’re ever disabled and cannot work. Even though the benefit will not cover 100% of the employee’s base wages, having some money coming in each month will help your employees.

The Importance of Disability Benefits

Disability benefits give workers who are unable to work because of a serious illness or accident a guaranteed income or job protection. To be eligible for disability benefits, a sickness or injury does not have to be tied to one’s job; it can be either temporary or permanent. Pregnancy, anxiety, depression, and chronic sickness are among the major causes of incapacity among American workers.

Read Also: The Role of Insurance in Financial Planning

For workers who have a qualifying disability, disability benefits can be essential. They frequently provide a much-needed safety net, enabling workers to support their families and pay their obligations while they are unable to work. Although workers’ compensation insurance, paid leave plans, and long-term care insurance are other types of disability benefits, short-term disability (STD) and long-term disability (LTD) insurance are the most widely used types.

One in 4 working adults will become disabled before reaching retirement age, according to data from the Social Security Administration (SSA). Unfortunately, many workers are unprepared to lose their income or unable to afford unexpected medical expenses. Income or job loss due to an illness or injury can be devastating for employees and their families.

Providing disability benefits can be important to an employer’s overall benefits strategy and aid in their attraction and retention efforts. It also allows employers to demonstrate their commitment to their workers’ well-being. Employees value disability benefits because they provide financial support when illness or injury prevents them from working. As such, they can be critical to protecting an employee’s future earnings as well as peace of mind.

Rising medical costs related to treating chronic conditions, disabilities and serious injuries make disability insurance more critical than ever. Additionally, they’re relatively inexpensive for employers. The costs for STD and LTD insurance is approximately 1% of an organization’s total compensation costs based on sampled data from 7,400 private industry employers, according to the U.S. Bureau of Labor Statistics (BLS). Employers who integrate their health and disability benefits can improve their workforce’s overall health by coordinating employees’ care, allowing earlier interventions and decreasing workplace absenteeism.

Types of Disability Benefits

Benefits for disabilities can take many different forms. Long-term care insurance, critical illness insurance, and paid leave programs are other forms of disability benefits, however STD and LTD insurance are the most prevalent. Employers can assess and choose which disability benefits to provide to their staff by being aware of the various kinds available.

Short-term Disability Insurance

STD insurance replaces all or a portion of an employee’s income due to a temporary disability. Under STD plans, employees receive a percentage of their income, typically 40% to 70% of their base pay, but employers can allow employees to supplement their STD benefits with paid sick leave or other benefits. An STD insurance policy is paid either fully or partially by the employer, and the median length of STD insurance coverage is 26 weeks, according to the BLS.

To qualify for STD insurance, an employee files a claim under their insurance policy. The employee must prove their illness or injury qualifies as a disability under the plan’s terms. STD insurance generally requires employees to wait for a short time period—on average, seven days—before they start receiving benefits to discourage abuse and because many employers’ paid- time-off benefits cover shorter absences than those covered by STD insurance. While STD insurance plans do not guarantee job protection, employees may be entitled to it through their employers’ policies or under state and federal laws, such as the Family and Medical Leave Act (FMLA).

Employers who offer STD insurance benefit because it helps employees to remain financially stable while recovering from an illness or injury, allowing them to stay productive and focused when they’re physically able to return to work. Since the income employees receive under STD insurance is paid by insurance companies, employers have the financial resources and flexibility to hire temporary or contract workers to fill workforce gaps without experiencing high labor costs. In states that don’t require employers to participate in disability income plans, employers can offer fully, partially or noncontributor STD insurance plans.

Long-term Disability Insurance

LTD insurance provides employees with income for long-term illnesses and injuries. Employees generally receive 60% to 80% of their base pay; however, some employers’ LTD plans offer more limited income replacement benefits. Similar to STD, employees receive income benefits until they’re able to return to work or have exhausted policy limits. LTD benefits requirements tend to be more rigorous than STD because workers need to demonstrate they’re unable to perform any job, not just the job they were working prior to the illness or injury.

These plans often work together with STD, so when an employee exhausts their STD benefits, LTD benefits continue to provide the employee with income. As with STD benefits, LTD does not provide workers with job protection. Employees who become permanently disabled may continue to receive LTD benefits through their retirement date or until they’re eligible for Social Security disability benefits.

Long-term Care Insurance

Long-term care insurance provides employees with coverage to treat chronic illnesses and disabilities outside of a hospital when individuals can no longer care for themselves. These policies cover services such as home health care, nursing home care, hospice care, assisted living facilities care and respite care. Long-term care insurance can help employees safeguard their financial futures. Employers tend to offer this benefit to help their aging workforce.

Critical Illness Insurance

Critical illness insurance gives employees a fixed lump-sum payment after being diagnosed with an illness that’s covered under the policy. These policies may cover conditions such as kidney disease, stroke, heart attack and cancer. Payments are made directly to the employee and can be used to cover deductibles, co-payments, household expenses and other costs. Critical illness insurance premiums are typically paid by employees.

State and Federal Disability Benefits

In some instances, employees may be entitled to disability benefits under state or federal law. For example, the FMLA provides eligible employees of covered employers with up to 12 weeks of unpaid, job-protected leave for certain family and medical reasons. Under the Americans with Disabilities Act, employers must consider providing disabled employees with reasonable accommodations. Leave from work may be an accommodation as long as it’s reasonable and doesn’t create an undue hardship for the employer.

Employees who experience work-related injuries and illnesses resulting in a disability may be entitled to workers’ compensation benefits. Such benefits are mandated in most states and provide employees with wage replacement and medical benefits. Additionally, the SSA provides disability benefits to workers as long as their disability will last for at least 12 months.

Several states have enacted their own leave-related laws, many of which provide injured or disabled workers with job- protected leave. Employers should consult with local legal counsel to discuss any state-specific disability or leave requirements.

Finally

The latest SSA data shows the average monthly SSDI benefit is $1,483.10 for disabled workers. That average is well below the maximum possible benefit, which is $3,822 in 2024. Someone’s exact SSDI benefit will depend on their work history.

The average monthly SSI benefit is much lower at $600.74. The maximum possible benefit for SSI in 2024 is $943.

If these average benefits sound low to you, it’s because they are. A previous Atticus study found that disability benefits aren’t enough to live on. No matter which state someone lives in, SSDI benefits are rarely enough to cover half of living expenses and SSI benefits cover less than a third of living expenses.

According to the most recent SSA report, New Jersey recipients have the highest average Social Security disability check at $1,648.06 per month, while SSDI recipients in Washington, D.C., have the lowest average monthly benefits at $1,217.00.

In most states, SSDI benefits are worth between $1,400 and $1,500 monthly, on average. Just 13 states have an average benefit worth more than $1,500 and only one state (New Jersey) has an average monthly benefit worth more than $1,600. At the other end, there are nine states where average SSDI benefits are worth less than $1,000 per month.

The state someone lives in doesn’t affect the value of their disability check but factors that vary by state — like average incomes or employment rates — could have an indirect effect on SSDI benefit amounts.