There are many types of private disability insurances that may be purchased by individuals or by companies on behalf of employees as a component of their benefits package. For example, if you are a sole proprietor of your own business, you may purchase Key Person disability insurance or Business Overhead Expense insurance to ensure that operations are maintained should you become disabled. Short-term disability insurance policies are typically held by larger companies on behalf of their employees so they may cover employee income should the employee become temporarily disabled due to an injury or illness incurred off the job. Long-term disability insurance held by an individual or through a company plan is designed to cover a portion of employee income should you become disabled for an indefinite period of time beyond the term of any existing short-term disability plan. Long-term disability plans may be effective for a couple of years or up to retirement age.
Tax laws are very specific regarding these insurance payments. As a general rule, income you receive from an employer-paid insurance plan is taxable as regular income. Income you receive from disability insurance that you paid for is not taxable. Therefore, if you elected to pay the premium for your long-term disability insurance, it is not reportable as income for internal revenue purposes. The tax picture is an important consideration in understanding your total potential income while on disability. As a general rule, assuming you are receiving non-taxable insurance payments of 60% of your base salary, you are effectively making an equivalent of approximately 75-90% of your prior income, depending on your tax bracket. Disability insurance is typically capped at a maximum monthly payout. In most circumstances that will be around $10,000/month.
Keep in mind that job-related illnesses or injuries are covered by worker’s compensation insurance, not disability insurance. Worker’s compensation insurance is manadatory for all employers. Worker’s comp provides remuneration for income, related medical expenses, and other costs incurred by the employee as a result of the injury. For more information, look here.
Short-term Disability Insurance
Short-term Disability Insurance is typically a company paid benefit that provides employees who have become temporarily disabled with a portion of their salary for the period they are unable to work. Typical short-term disability payments are 40-65% of your base salary; however, they may be as high as 100%. Short-term disability periods vary, depending on the specific insurance policy held by your company. Six months is a typical duration, but some may last up to two years.
In general, short-term disability insurance will kick in as soon as an employee has exhausted their paid sick days. Depending on your company, there may be more flexibility allowed, however, the intent is also for the company to cover their cost of having you out of commission. When the short-term disability insurance is invoked, they are no longer paying your salary. This benefits both company and employee in the event of an unforeseen disability and is an anticipated part of business.
If you and your doctor feel that you are currently unable to work, this insurance is intended to accommodate such a need. Keep in mind, however, that the company’s obligation to return you to your current job, or any job, is limited to FMLA rules. Before you go down the path of taking disability leave of any kind, make sure you understand your company’s position on returning you to work and to your specific job. The better your standing with the company, the more likely you will be returned to your present job. Consider also the company’s situation should you remain absent for an extended period. How long will they be able to continue normal business operations without having to replace your position? These are of course serious considerations and are the reality of determining if you are ready to go this path.
At the end of the day, Short-term disability is intended to help you and keep you as a valued employee while you mend from a short-term illness or injury. That implies that there will be a plan to recover and an end in site for the disability.
Long-term Disability Insurance
Long-term disability (LTD) insurance kicks in after short-term disability insurance has expired. Long-term disability insurance is often not paid by the company, rather is offered as an optional employee-paid insurance benefit. For individuals working at companies that do not offer long-term disability insurance benefits, individual LTD policies are available from most major insurers. As a general rule, it is better for the employee to pay for this insurance than the company because employee-paid LTD insurance payments are tax free. LTD insurance provides benefits for either 2-5 years or until retirement age, depending on the policy.
LTD typically pays 50-60% of your base salary at the time the disability begins, depending on the policy. Again, that would be non-taxable income if it is an employee-paid policy, so it may be equivalent to 75-90% of your pre-disability income. The payment amount determined at the start of your long-term disability establishes your base income level for the duration of the disability. If you have other income from social security, work, or other sources during your disability, the insurance company will deduct that amount from their monthly payout up to your base income amount. If at some point you are earning the equivalent of your base, your LTD insurance may be terminated. Most regular LTD insurance policies are capped at a maximum amount payable per month – around $10,000. There are high-cap policies available at additional cost.
The insurance company covering an LTD claim will require periodic review of your claim, including access to all medical records, pharmacy records, income statements beyond the insurance payout, personal logs about your disability, and other information requests at their discretion. Depending on the potential duration of your claim, the insurance company may have a considerable financial obligation to you and, for that reason, may seek to reduce or eliminate that burden. If you claim that you are unable to work, but are found to be working under the table, that will likely (and appropriately) be prosecuted as fraud. If you say that you cannot lift 40 lbs, then building a concrete patio in your back yard would probably be grounds for cancellation. You get the picture – be very clear and honest about what you can and cannot do and consider that your real limitation.
Opting-in to long-term disability insurance coverage is wise for anyone in the working world. You never know what can happen.