What is the difference between workers’ compensation vs. disability insurance?

Insureon staff
Although they are similar policies, workers’ comp protects both the employer and employees from the cost of job-related injuries and illnesses, while disability insurance covers an employee for medical issues that happen outside of the workplace.
A patient reviewing their workers' compensation insurance policy on their laptop

Workers’ compensation insurance and disability insurance both provide financial help to sick and injured workers who are unable to work.

Most states require businesses with employees to provide workers’ compensation insurance. It pays for medical expenses if an employee suffers a work-related injury or illness. It can also help offset an employee’s lost wages if they’re unable to work for a period of time.

Disability insurance offsets an individual’s lost income if they’re disabled and unable to work because of an injury or illness that happens outside of work. While this coverage is typically not required, some states such as California have state disability programs that require coverage for all eligible employees.

Is disability a form of health insurance?

Disability insurance is often thought of as health insurance that covers disabilities, though in reality, it’s a type of income insurance that offers financial support when someone is unable to work because of an injury or medical condition.

The income support could range from 50 percent to 70 percent of someone’s lost income, and can be used for any purpose by the recipient, although it’s often used to cover living expenses and medical bills.

There are two kinds of disability insurance:

Short-term disability

Short-term disability provides disability benefits from three to six months. Many employers offer this coverage as part of a group insurance plan, with either the employer or the employees paying the premiums.

Long-term disability

Long-term disability offers disability benefits for multiple years, and is reserved for longer lasting or even permanent disabilities. This is typically purchased by individuals on their own from an insurance company, although some employers offer it as optional coverage paid by the employee through payroll deductions.

How are workers’ compensation benefits and disability benefits different?

Workers’ comp covers work-related illnesses and injuries, usually without co-pays and deductibles. It also partially offsets an injured employee’s benefits if they’re unable to work. If an employee dies from a work-related mishap or illness, their workers’ comp benefits can provide a cash benefit to the employee’s dependents.

A disability insurance policy may cover things like physical impairments after an accident outside of work, mental illness, pregnancy complications, or diseases such as muscular dystrophy and muscular sclerosis. Disability insurance benefits do not include criminal activities or an act of war.

What is the difference between workers' comp and health insurance?

View video transcript.

As a business owner you might be asking: Do I need workers comp if I have health insurance? The answer is no, and yes, depending on if you operate solely or if you have employees.

While workers' compensation insurance and health insurance both provide protection from illness and injuries, that's where the similarities end.

Workers' comp can provide several benefits if you or your employees are injured on the job or suffer from a work-related illness. And it's required in most states if you have at least one employee.

Health insurance can help pay the medical expenses for non-work related injuries or illnesses if you have fewer than 50 employees, you're not required to offer health insurance. But, if you have 50 or more, you may be obligated to offer this coverage.

When it comes to workers' compensation premiums, you must pay 100 percent of the cost. And with health insurance, you typically contribute a portion of the monthly cost with your employee paying the rest.

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How do workers’ comp and disability help employers and employees?

Workers’ compensation does more than just help employees with medical care and income loss, it can protect employers from having to pay out-of-pocket for this type of care, while avoiding lawsuits at the same time.

When employees accept payment via a workers’ comp settlement, they give up the right to sue their employer for covered incidents. This helps the employer avoid costly litigation, and allows employees to get the help they need right away as a workers’ compensation claim can be processed much faster than waiting for a lawsuit to work its way through the court system.

Many employers offer disability coverage, even when it is not required, because it can be a cost-effective way of keeping a medical mishap from turning into a financial burden for their employees.

Another thing to consider is the income replacement benefits from workers’ comp may not be enough for some higher income earners. Many states limit the amount of income replacement available in workers’ comp insurance, so some employers and employees buy disability coverage to make sure they’re financially protected.

Many employers offer disability coverage, even when it is not required, because it can be a cost-effective way of keeping a medical mishap from turning into a financial burden for their employees.

When do I need workers’ comp or disability insurance?

Depending on the workers’ comp laws in your state, you’ll likely need workers’ comp coverage as soon as you hire your first employee, although some states set the bar a little higher. For riskier occupations, such as construction, some states require this coverage for independent contractors.

For example, California requires employers with one or more employees to provide this coverage for any employee who regularly works in the state. Roofers are required to have their own coverage even if they work alone.

Missouri requires businesses with five or more employees to provide workers’ comp. Independent contractors, sole proprietors, and owner partnerships are exempt.

The states of California, Hawaii, New Jersey, New York, Rhode Island, and the territory of Puerto Rico, all require employers to participate in state disability insurance programs.

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Do self-employed individuals need workers’ comp or disability insurance?

Sole proprietors and contractors with no employees typically aren’t required by law to obtain workers’ compensation insurance, although some states require them for riskier professions.

Regardless of your profession, this coverage might be required to qualify for certain contracts. Some companies require their contractors to have their own workers’ comp insurance because it reduces the company’s liability if a contractor is injured on the job.

Many contractors buy this coverage for the financial protection it offers. If you’re an independent contractor or a sole proprietor, your regular health insurance is unlikely to cover you for a workplace injury or illness. A workers’ comp claim can also replace some of your lost wages if you’re unable to work after an accident.

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