Should You Buy Disability Insurance Through Work?
Nov 17, 2023
A guide to help you decide if the cost is
worth it before open enrollment
Don’t let the complexity of disability insurance keep you from
buying it.
Disability insurance involves confusing paperwork and more than a
little bit of math. It is designed to soften the financial fallout for
employees who can’t work for some time as a result of illness, injury or
another qualifying condition. For a regular fee, you get income back for a
predetermined amount of time.
But understanding how it works is only part of the
equation. You also have to understand the cost.
Financial advisers say a typical policy bought through
your employee benefits costs between 1% and 3% of your regular income. If the
policy being offered through your employer is higher than that, it might not be
worth it, they say.
If your policy price is in that range, it is worth a
real examination of the risks associated with your job and your health since
more companies are now offering this coverage. As of 2023, roughly two-thirds
of all U.S.-based companies across all industries provided an option for
disability insurance, according to data from the Society for Human Resources
Management.
“These are products you hope you never have to use,”
said Corey Kines, voluntary benefits sales leader at OneDigital, a consulting
firm. “You may think ‘God, it’s coming out of my paycheck every month—am I ever
going to use this?’ But then if you do have to use them, you’re glad that you
have them.”
What does disability insurance do?
Short-term disability insurance protects a portion of
employees’ income for those who intend to return to work after recovering from
an injury or illness. Many short-term disability policies also allow pregnant
workers to take maternal benefits after giving birth.
Most short-term disability policies provide coverage ranging from
three to 12 months, which is determined by state law and the individual
insurance. Sometimes, employees have to wait up to three months before their
benefits kick in. A handful of states, including California, New York and Rhode
Island, require employers to offer short-term disability to workers.
Long-term disability insurance pays employees a portion of their
income, between 60% and 80% of total salary, beyond the point of short-term
disability. Accessing long-term disability benefits often means a longer wait
time than for short-term disability.
Think of long-term disability insurance as an add-on plan boosting
the publicly available coverage, said Jonathan Gruber, professor of economics
at the Massachusetts Institute of Technology.
“Think about paying $20 a month versus you don’t pay that and then
something does go wrong—and you have to live the rest of your life on 40% of
your wages,” he said.
What qualifies as a disability?
The definition of disability varies by state and depends on the
individual policy, Kines said. In most cases, pregnant employees or those
struggling with mental health—two
conditions one might not immediately associate with disability—are able to take
advantage of short-term disability to make up their salary while taking time
away from the workplace.
Employees can scrutinize their policy and ask their HR team to
explain what is covered under the offered policy, Gruber said.
“You need a responsive and respectful human-resources process that
evaluates cases on a consistent basis and can have as bright lines as
possible,” he said.
Just as important as understanding what constitutes disability,
Kines said, is defining the term earnings. While some policies protect total
income, including commission and other industry-specific pay, other policies
only provide base salary, he said.
Check with your HR team to best understand what you would receive
under this benefit should a disaster strike.
Who needs disability insurance?
While some employers already incorporate short-term disability
insurance into their benefits—whether by design or by law—Kines recommends all
employees, regardless of age and income, add long-term disability to their
plan. The majority of people, he said, would be unable to replace any income
lost for the years before retirement.
“Behind health insurance, long-term disability insurance is the
most important product to have,” he said.
Younger workers who are new to the workforce might scoff at the
prospect of adding another expense to their health-insurance plan, Gruber said.
He encourages these “young invincibles” to think twice before skipping ahead.
Those nearing retirement age, however, are right to scrutinize the
supplemental coverage’s overall benefit to their plan, Kines said.
A common misconception leads many to believe disability insurance
won’t protect workers past age 65. But many long-term disability insurance
policies will cover at least one additional year, Kines said.
“It’s a math problem at that point: Is this premium I’m paying
worth the potential one year benefit?” he said.
Some people can also apply for public disability, which allows
people to tap in to their Social Security benefits early.
The cost of disability insurance
Disability-insurance premiums are calculated according to the
individual worker’s age, income and industry, among other factors. The cost of
the premiums in employer-offered plans is typically between 1% and 3% of the
employee’s regular income, Brennan said. Some employers offer short-term
disability at no cost to their workers.
There is often a tax benefit to disability insurance. Workers can
pay their premiums with after-tax dollars; that means that come tax time, they
won’t owe taxes on disability benefits that are paid out.
In addition to company-sponsored plans, another option is to get
disability coverage from private insurance companies. They can be cheaper but
often charge more, health advocates and financial advisers say. Given your
employer may be paying part of the premium, there is also a tax benefit to
buying through your company.
“If it’s offered through your employer, it is typically a
no-brainer, because it is tax-preferred and it is a risk we all take,” Gruber
said. “If you’re buying it on your own, it’s not a no-brainer.”
Source: Wall Street Journal