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Think about the people who keep your business running. Now picture one of them calling you one morning, not to take a sick day, but to tell you they’ve been diagnosed with something serious, or that they need major surgery and won’t be back for months.
What happens to their income while they’re out? For many small business owners, that question doesn’t have a clear or encouraging answer.
Not because there’s a lack of empathy, but because disability insurance is one of those topics that tends to get pushed to the back burner until it’s urgent. The decision feels complicated, the terminology is unfamiliar and it’s easy to assume that workers’ compensation or health insurance already covers all of your bases.
In reality, these policies almost certainly don’t provide what your employees need most. That’s why we put together this guide to the top seven disability insurance questions, answered for small business owners across the U.S.
The honest answer is yes, disability insurance is more important than most people think. You see, when most of us hear the word “disability,” we picture something dramatic—a major accident or a rare diagnosis.
But many of the most common disability claims come from things like back problems, joint conditions, cancer or serious mental health issues. These aren’t edge cases! They’re the kinds of health realities that can sideline an employee for months, or longer.
According to the Social Security Administration, more than one in four of today’s 20-year-olds will be out of work for at least a year due to a disabling condition before they reach retirement age. For a small business owner, that can have a major impact.
If one of your key people were out for six months, what would that mean for them financially? For their family? Disability insurance exists so that question has a better answer.
Workers’ compensation covers injuries and illnesses that happen on the job, while disability insurance covers everything else. This is one of the most common misconceptions among U.S. business owners.
As a business owner, that distinction matters more than you might realize, because the vast majority of long-term disability claims have nothing to do with the workplace.
The reality is that most disabling conditions stem from illness rather than injury. This typically looks like chronic disease, serious surgeries, mental health conditions, pregnancy complications and more. Workers’ comp wouldn’t apply to any of those situations.
Offering workers’ comp alone leaves a real gap in your employees’ financial protection. Disability insurance is what fills it!
Short-term disability (STD) insurance is built for situations where an employee needs to step away from work for a limited time. Most STD plans cover three to six months and typically replace 60 to 70 percent of income during that window.
Long-term disability (LTD) insurance is designed to kick in when short-term coverage runs out. According to current industry standards, LTD usually covers 50 to 70 percent of pre-disability income. It can pay out for a set number of years or through retirement age, depending on the policy.
These two types are designed to work together as a continuum, not as separate decisions. Short-term coverage bridges the immediate gap; long-term coverage handles the extended absence. Most employees benefit from having both.
An elimination period (sometimes called a waiting period) is the stretch of time between when a disability begins and when benefits start paying out. Think of it like a deductible measured in days rather than dollars.
For most long-term disability policies, the standard elimination period is around 90 days. For short-term disability plans, it’s typically much shorter, sometimes as few as seven days.
That gap between the start of an LTD claim and the first benefit payment is usually covered by an STD plan, accrued paid time off or the employee’s personal savings.
For employers, the elimination period is also a lever that affects plan cost. A longer waiting period generally lowers the premium, which is worth knowing when you’re making plan design decisions.
Every policy defines disability differently, so the fine print is going to make all the difference. That said, most share a similar list of exclusions. Common ones include self-inflicted injuries, disabilities resulting from war or military conflict, pre-existing conditions (definitions vary by policy) and on-the-job injuries that are covered by workers’ compensation instead.
One of the most important details to understand when selecting a policy is the definition of disability itself.
Policies generally fall into two categories: own-occupation coverage, which pays benefits when an employee can no longer perform their specific job, and any-occupation coverage, which only pays if the employee can’t work in any capacity.
Own-occupation coverage is more comprehensive and especially relevant for employees in specialized roles.
It depends on the policy. Many disability plans allow employees to work part-time while receiving benefits, but the earnings are factored in. The policy will typically subtract what the employee earns from the benefit amount, so the two together don’t exceed a set percentage of their pre-disability income.
If the policy has a lifetime benefit cap, part-time work can actually stretch how long the benefits last. As an employer, it’s worth understanding these details so you can set clear expectations with employees during onboarding and open enrollment—before a claim is ever filed.
The standard target is coverage that replaces 60 to 70 percent of pre-disability income. Most insurance carriers won’t sell policies that replace 100 percent, and that’s by design. Said another way, there’s a financial incentive built in to encourage returning to work.
But how far that coverage ultimately goes depends in part on tax treatment.
If the employer pays the premium, the benefits employees receive are generally considered taxable income. If employees pay their own premiums using after-tax dollars, the benefits are typically tax-free.
At 70 percent coverage, tax-free benefits can come close to replicating a full take-home paycheck, per IRS guidance on disability insurance proceeds.
Optional add-ons called riders can strengthen a policy for employees who need more flexibility. Own-occupation coverage, cost-of-living adjustments and residual disability benefits are all worth discussing with a benefits advisor.
Disability insurance isn’t the most exciting part of running a business, but it’s one of the most meaningful things you can offer your people. When an employee is dealing with a serious illness or a long recovery, the last thing they have energy to worry about is how they’ll pay their bills.
The right coverage looks different for every business. It depends on your team size, budget and the specific needs of your workforce.
If you’re ready to make sure your employees are protected, the disability insurance team at Fringe Benefit Analysts can help you sort through the options and find a plan that makes sense for your situation. Reach out to us today to learn more or start the process.
Disability insurance protects an employee’s income when illness or injury makes it impossible to work. Unlike health insurance, which covers medical bills, or workers’ comp, which only applies to workplace injuries, disability insurance replaces a portion of lost wages during an extended absence.
It gives employees a financial safety net and gives business owners one less thing to worry about when someone needs to step away from work for weeks, months or even longer.
Yes, for two reasons. First, if your business depends on you personally, a disabling illness or injury could put operations at serious risk. Second, offering disability coverage to your team has real recruiting and retention value, especially in competitive markets like Utah’s.
Employees notice when an employer invests in protecting their financial wellbeing. Benefits packages that include disability coverage tend to build the kind of loyalty that makes a serious difference long-term.
Three factors that deserve close attention during the selection process:
For self-employed individuals, disability insurance is especially important. Without an employer-provided safety net, a disabling illness or injury can quickly threaten both personal finances and business stability. Most self-employed people can purchase an individual disability policy that replaces 40 to 60 percent of their income.
If you have even one employee, the numbers change. Group coverage becomes available and typically offers better rates and broader benefits than individual plans alone. Fringe Benefit Analysts works with both individuals and businesses to find the right fit.
It depends on the structure. When a business pays group disability insurance premiums for its employees, those premiums are generally deductible as a business expense, per the IRS. But the benefits employees receive are then considered taxable income.
When employees pay their own premiums using after-tax dollars, the benefits they receive are typically tax-free. Self-employed individuals may be able to deduct premiums as a business expense, but doing so makes any benefits received taxable.
The pros of offering disability insurance as an employer:
While the potential downsides include:
Understanding these trade-offs is exactly what a good benefits advisor helps you work through. If you’re a Utah small business ready to take a closer look at your options, Fringe Benefit Analysts is here to help. Reach out to our team to learn more today!
Ernie Sweat is a Senior Consultant/Producer at Fringe Benefit Analysts (FBA), a company that specializes in employee benefits. With FBA's expertise in compliance and understanding client needs, Ernie Sweat helps people navigate their health, dental, and life insurance options.[...]
