A woma sits on a gray couch with a phone to her ear. She's looking at the piece of paper in her hand and her left leg is wrapped in a cast and elevated on a cushion in front of her.
Disability insurance offers employees income when they're unable to work due to short- or long-term injuries, illnesses, or disabilities. — Getty Images/AntonioGuillem

Disability insurance, like many other types of insurance, is something you hope not to need — but you’ll be grateful to have it if something goes wrong. Unfortunately, as many as 43% of individuals aged 40 will have a long-term disability ​​​​​​​by the time they turn 65.

As an employer, you are not required to offer long-term disability insurance. However, about half of large and mid-sized employers offer it to their workers, according to the Insurance Information Institute.

[Read more: Workers' Compensation Insurance: What It Is, and Why You Need It]

Here’s what business owners need to know about disability income insurance and what it covers.

What is disability insurance?

Disability insurance, or disability income insurance, offers individuals income when they are not able to work due to an accident, injury, illness, and/or disability. Disability insurance policies are provided to individuals through employers, the Social Security Administration, or private insurance companies. In exchange for monthly payments, the insurance company agrees to pay a monthly benefit amount should you suffer from a disability that impacts your ability to work.

Disability insurance is different from workers’ compensation insurance. “While workers’ compensation offers protection against work-related injury and illness, disability income insurance extends coverage outside of the workplace,” wrote Northwestern Mutual. Workers’ comp covers medical expenses related to the illness or injury and replaces a portion of wages you may miss as a result of the accident. Thereafter, disability insurance kicks in.

[Read more: What Is the ADA, and How Does It Impact Small Business?]

One of the biggest confusions around disability insurance stems from the definition of a “disability.” Disability insurance falls under two categories: short-term and long-term disabilities.

Short-term vs. long-term disability insurance

As the name implies, short-term disability insurance gives employees coverage for an illness, injury, or other disability that requires a short time away from work. Short-term disability insurance kicks in after wage insurance, which means there may be a waiting period of up to 14 days before benefits become available. Short-term disability insurance covers a maximum of two years.

Long-term disability insurance covers more lengthy or lifelong events. These policies kick in after short-term disability benefits are paid out.

While workers’ compensation offers protection against work-related injury and illness, disability income insurance extends coverage outside of the workplace.

Tim Stobierski, Northwestern Mutual

A common misconception about long-term disability insurance is that it will only apply to freak accidents or rare birth defects — extreme cases of injury or illness. In reality, “90% of claims filed for long-term disability benefits stem from medical illnesses, not physical injuries,” wrote Breeze, a disability insurance product. The scope of disabilities that can prevent someone from earning an income is broader than you may think.

What benefits does disability insurance offer?

It’s worth noting that disability insurance won’t pay 100% of an employee's salary and may not guarantee job protection. Disability insurance policies typically pay 60 to 80% of earnings before the accident, injury, or illness.

There are a few factors that a private insurance company or the Social Security Administration will consider when determining a disability insurance policy. When assessing risk, these organizations will look at:

  • Your age, gender, and health history.
  • Your occupation and annual income.
  • Your location.
  • Any pre-existing health conditions.
  • Your family (e.g., do you have children under the age of 18?).

The Social Security Administration offers an online checklist of the information you would need to provide in applying for adult disability income insurance. This can give you a snapshot of the detail you will need when signing up for a policy with the government.

You may also be covered by state disability insurance if you live and work in one of five states: California, Hawaii, New Jersey, New York, or Rhode Island. These states offer “Temporary Disability Insurance (TDI)” programs to provide income support to individuals who are out of work because of a non–work-related illness or injury. Alternatively, if you operate a business in those states, help your employees learn more about their eligibility for coverage under TDI programs.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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