Insurance provides income during short-term disabilities

Janet Arrowood

For most business owners and employees, their most valuable asset isn’t their houses or investments or 401(k) plans, but rather their ability to earn income.

So what happens if the ability to earn an income is temporarily lost? Maybe you provide a limited number of paid sick days, but those are generally very limited. Maybe the situation is covered by workers’ compensation. But if the sick days run out and workers compensation doesn’t apply? How is lost income replaced?

Enter disability income insurance — DI for short. There are two main types of employer-provided DI. Both can be either employer- or employee-funded.  This column will focus on the most frequently overlooked and most likely to be used version: short-term DI.

When a person experiences an illness or injury that isn’t work-related, workers’ compensation rarely, if ever, pays a benefit. Social Security DI is for long-term disabilities. It’s time-consuming and difficult to apply and qualify for Social Security benefits. Long-term DI has a waiting period of 90 to 180 days or more. That leaves short-term DI to fill in the gap.

Short-term DI benefits generally cover a period of 60 to 365 days, replacing about half a person’s income while waiting for long-term DI benefits to start. The person benefiting usually must have used all available sick and other paid time off. In most cases, this benefit is not taxable. But always consult with your tax professional to confirm this point.

When employers sponsor a short-term DI plan, the rates are generally much lower than if employees obtain their own short-term DI plans from private insurers.

Rates for short-term DI are based on the type of work covered, with higher-risk professions paying higher premiums — much like workers’ compensation.

Unlike workers’ compensation, there’s rarely, if ever, a look-back provision to determine actual wages paid. You specify an income amount to be covered, and benefits are paid based on that amount. The covered income could be verified by the insurance company, though, so inflating income isn’t a good idea.

How likely is it someone will experience a short-term disability?

According to information from the website at http://DisabilityCanHappen.org, 5.6 percent of working Americans will experience a short-term disability of six months or less due to illness, injury or pregnancy on average every year. Almost all these disabilities are non-occupational in origin. Some of the most common causes of short-term disability include pregnancies (25 percent); musculoskeletal disorders affecting the back and spine, knees, hips, shoulders and other parts of the body (20 percent); and mental health issues (7.6 percent).

Physically demanding work can increase the risk of disability. According to the U.S. Bureau of Labor Statistics, a physical laborer is twice as likely to suffer a disability that prevents him or her from working. Athletes — particularly those who engage in such riskier activities as off-road biking or driving, skiing or snowboarding  — also face the increased likelihood of a disabling injury.

Once disabled, how long can you expect the situation to last?

According to the National Institute on Disability & Rehabilitation Research, you can expect the average disability claim to last 90 days or less. But once the disability reaches the 90-day mark, the duration can quickly extend to more than three years.

How much does short-term DI cost?

As a very general idea, private insurance runs between 1 percent and 3 percent of annual earnings, according to the National Insurance Association. Group or employer-sponsored short-term DI is significantly less expensive. Many employers who provide short-term DI pay the premiums, but it might be possible to pass these costs on to your employers. Always consult with your insurance and tax professionals since every company’s situation is unique.