Disability insurance is a crucial safety net that supports employees who can’t perform their job requirements due to a qualifying condition. This type of business insurance falls under two umbrellas — short-term and long-term disability insurance — and they serve different purposes depending on the employee’s situation.
As a business owner with employees, it’s important to familiarize yourself with your legal obligations and your employees' responsibilities regarding both types of disability insurance.
Short-term disability insurance
Short-term disability insurance temporarily replaces a portion of an employee’s income in the event that they are unable to perform their job duties due to a qualifying medical condition.
What does short-term disability cover?
Short-term disability typically replaces between 40 and 70% of an employee’s salary and lasts between 3 and 6 months, though it can last a few weeks to a year, depending on the policy. Benefits typically begin after a short waiting period (also known as an elimination period), commonly between 7 and 14 days.
How does short-term disability work?
The process begins with the employee or HR submitting a claim, along with medical documentation proving they cannot perform their job duties, to the insurance company or state provider. Unlike workers’ compensation, short-term disability generally covers non-work-related medical conditions, including recovery from injury or surgery, pregnancy, and childbirth.
Depending on your state, short-term disability may be available through a private carrier or as an opt-in benefit. Employers also decide whether premiums are employer‑paid, employee‑paid through payroll deductions, or shared between both.
[Read more: A Guide to Choosing the Best Small Business Insurance: Types, Costs, and Coverage]
Long-term disability insurance
Unlike short-term disability, which supports employees during a temporary absence, long-term disability coverage is for individuals who are unable to work for an extended period of time due to injury or illness. Often, short-term disability benefits are exhausted first.
What does long-term disability cover?
Long-term disability typically replaces roughly 60% of an employee’s gross monthly income for the duration of their coverage. This can last for two years or up until Social Security begins, depending on the policy. Qualifying conditions include:
- Cancer.
- Mental illness.
- Arthritis.
- Back problems.
- Stroke.
- Other conditions that prevent them from completing daily job duties.
How does long-term disability work?
To qualify, an employee must remain unable to work beyond the period covered by short-term disability. The individual must provide medical records supporting their claim. Benefits typically pay out after a longer waiting period, typically between 90 and 180 days.
Long-term disability through an employer is often less expensive and less comprehensive than private policies. Employers are not obligated to provide long-term disability, though they may choose to do so as part of a comprehensive benefits package. If you do provide this benefit, employees generally can’t take the coverage with them if they leave the company.
Key differences between short-term and long-term disability insurance
Short-Term Disability
- Best for: Temporary illnesses, injuries, or conditions.
- Benefit duration: A few weeks to up to one year.
- Benefit amount: Typically 40-70% of salary.
- Waiting (elimination) period before benefits begin: Between 7 and 30 days (14 days is common).
Long-Term Disability
- Best for: Extended illnesses, injuries, or conditions that prevent an employee from working long term.
- Benefit duration: Two years to retirement.
- Benefit amount: Typically about 60% of gross monthly income.
- Waiting (elimination) period before benefits begin: Between 30 and 180 days (90 days is common).
Employers are not obligated to provide long-term disability, though they may choose to do so as part of a comprehensive benefits package.
Disability insurance for self-employed owners
Self-employment disability insurance works differently from employer-sponsored coverage.
- Policy purchasing. Self-employed owners must buy an individual policy directly from the insurer or insurance agent and must prove that they are self-employed.
- Short-term availability. Short-term disability policies for self-employed individuals may be more expensive and less widely available.
- Type of coverage. In addition to personal disability insurance, many self‑employed owners also purchase Business Overhead Expense (BOE) coverage to keep the business running if they’re unable to work.
- Cost and underwriting. Individual disability policies for self‑employed owners typically cost 1 to 3% of annual income, and underwriting requires proof of self‑employment and income stability.
- Policy guarantees. Self-employed owners can choose a policy that is non-cancellable and guaranteed to be renewable.
[Read more: Why Small Businesses Need Life Insurance]
What to consider when shopping for a disability insurance policy
Some important things to consider when shopping for a policy include:
- Benefit amount. Look for policies that provide sufficient income replacement to meet employees’ needs while fitting your budget.
- Waiting period. Shorter waiting times mean faster payouts, but may come with higher premiums.
- Residual benefits. Some partial-disability coverage plans pay benefits when employees need to take reduced hours.
- Inflation protection. Plans with this will automatically adjust to offset cost-of-living increases.
- Exclusions and limitations. Review what conditions or injuries aren’t covered to avoid surprises.
- Tax implications. Premiums an employer pays for may make benefits taxable; employee-paid premiums are generally tax-free.
How much disability coverage do you actually need?
When deciding which types of disability coverage to offer your employees and how much they need, you’ll want to consider several factors. Only a handful of states require employers to provide temporary disability benefits; here, compliance should be the starting point. Beyond that, you may choose to offer more or less than the typical amount; higher coverage levels can strengthen your overall benefits package, though they come with higher premiums.
Coverage levels should reflect the demographics and job risks within your workforce. Employers with higher-risk roles may choose more comprehensive coverage than those in lower-risk industries. Review your coverage annually to ensure it aligns with your team’s needs and is still within your budget. Premiums for employer-provided plans will vary by industry, but you can often tailor coverage terms — like benefit amounts and waiting period — to fit your workforce and budget.
Miranda Fraraccio contributed to this article.
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