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What to Know About Short-Term and Long-Term Disability


Disability insurance provides income replacement to employees who are unable to work because of an illness or accident that is not work related. It should not be confused with workers' compensation — which covers work-related illnesses and injuries.

Despite taking a back seat to more popular types of health insurance — such as medical, dental and vision — disability insurance is gaining steam among employers. According to the Bureau of Labor Statistics, between 2008 and 2018 there was a slight increase in the number of employees who had access to short- and long-term disability insurance.

What Is Short-Term Disability Insurance?

As the name implies, STD insurance replaces all or part of the employee's wages for a limited amount of time. Per the BLS, the median time period for STD coverage is 26 weeks. However, some policies can last for up to two years. Benefits are paid according to a percentage of the employee's pay, which is typically 60% to 80%.

Although STD insurance is often used by women who go on maternity leave, it can be used for many other reasons — including injuries caused by an accident, recovery from surgery, and ailments that restrict the employee's ability to work. STD is not a mandatory benefit at the federal level, but a number of states require that employees be given access to STD insurance.

Long-Term Disability Insurance

Many employers that offer STD insurance also provide LTD insurance — which lasts for two years or more. Some LTD policies last for decades or until retirement. LTD insurance typically covers 60% to 70% of the employee's pay.

According to the BLS, employees are eligible for LTD insurance three to six months after becoming disabled. If the employee also has STD insurance, he/she will receive STD insurance while waiting for the LTD insurance to kick in.

LTD insurance covers illnesses and injuries that prevent the employee from working, such as cancer, injuries caused by an accident, mental health issues, and musculoskeletal and nervous system disorders. It does not cover childbirth, nor does it cover preexisting conditions discovered before the LTD coverage began.

Who Pays?

STD and LTD insurance premiums are paid for by the employee, the employer or both. In jurisdictions that require employers to provide STD insurance, there are specific requirements as to who must — or can — pay the premiums.

When employers voluntarily offer disability insurance, some pay the full premium, while others pay a portion of the premium and deduct the rest from the employee's pay. Some employers deduct the entire premium from the employee's wages, while others pay for a specific amount of coverage and allow the employee to pay for extra coverage.

As stated by the Council for Disability Awareness, "half of those who don't work for the government have some form of employer-paid disability insurance." So if your goal is to use disability insurance as an attraction and retention tool, you should assume at least some of the cost.

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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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