Disability insurance

If an illness or injury keeps someone from working for an extended period, disability insurance provides financial assistance to replace a portion of lost income. Coverage is typically available through employer-provided or voluntary employee benefits.

Small business insurance can also provide disability benefits with a workers’ compensation policy if an employee becomes disabled after a work-related injury or illness.

Disability insurance for small businesses is not normally a government requirement. However, businesses that operate in California, Hawaii, New Jersey, New York, or Rhode Island are required to provide employees with short-term disability insurance.

If you have employees, most states require you to carry workers’ compensation insurance, which provides benefits for work-related disabilities. Workers’ compensation requirements vary by state.

Disability insurance covers only injuries or illnesses that occur outside of the workplace. Workers' comp disability insurance provides benefits only for injuries and illnesses that are work-related. The benefits include funds to pay for medical care, as well as for lost wages (typically two-thirds of normal pay).

Workers’ comp disability coverage will generally pay less than short-term disability insurance (roughly 66% of pay vs. 80% of pay). But it pays roughly the same percentage as does long-term disability, but for a shorter period (unless the employee is declared permanently disabled).

Workers’ comp disability comes in two basic flavors:

• Open (or active) claims, which means an employee is totally disabled due to a work injury and receives about two-thirds of his pay in most states. Another option: if the employee is able to work in a less demanding job or for fewer hours, the workers’ comp insurer will pay the difference between the person’s original pay and what he’s making on lighter duty (not available in all states).
• Closed claims refer to those where the employee was declared totally and permanently disabled and provided with a lifetime pension. Partially disabled workers might receive a smaller lump sum or weekly benefit check for life.

To prove eligibility for disability insurance, the policyholder needs to meet the policy’s definition of disability. Two common definitions are own occupation and any occupation:

Own occupation means if you can’t perform the duties of your regular job, you’ll be considered totally disabled and eligible for benefits. This doesn’t mean you have to be bedridden, just that you can’t perform your regular duties.

Any occupation means if you can’t perform the duties of any reasonable job that would typically be suitable for you, you’ll be eligible for benefits. If you are able to work part-time in your normal job or in some other comparable field, you won’t qualify for your full disability benefits. However, you still might be able to receive a partial benefit.

Once you’re eligible, you still need to fulfill an elimination period (or waiting period) before receiving your first disability income check. The longer the wait you selected, the less expensive your disability insurance policy will be.

Finally, once your disability benefit payments begin, they will last until the end of the benefit period. This will depend on whether you purchased a short-term or long-term disability insurance policy.

There are four main types of disability insurance: short-term disability (STD), long-term disability (LTD), Social Security disability insurance (SSDI), and workers’ compensation, which is covered in other sections.

Short-term disability features:

• Benefit duration: Three to six months
• Elimination period (or waiting period): 14 days or less
• Benefit amount: Up to 80% of gross monthly earnings
• Source of coverage: Often provided as an employer-provided benefit or purchased independently. Mandatory in some states.

Long-term disability features:

• Benefit duration: Two years, five years, 10 years, or until you retire
• Elimination period: 30 to 720 days, often 90 days
• Benefit amount: Up to 60% of gross monthly earning
• Source of coverage: Employer-provided benefit or directly from an insurer

Social Security disability features:

• Benefit duration: For as long as your disability lasts
• Elimination period: Six months
• Benefit amount: Based on average lifetime earnings
• Source of coverage: Available to U.S. citizens who’ve paid into Social Security

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