Disability Insurance

According to a recent survey, 4 in 10 American workers live paycheck to paycheck. This means that an unexpected illness or injury that takes an employee off the job for more than a few days can have devastating consequences for those who depend on their wages to survive. Disability insurance – sometimes called disability income insurance – helps protect workers’ incomes against the possibility of loss of work from illness or injury.

What it Covers

In a nutshell, disability insurance helps replace a portion of a worker’s income if that worker loses his or her income due to an injury or illness. Typically, disability insurance policies will replace between 50% and 65% of a worker’s income – a percentage low enough that most people would prefer to return to the workforce as soon as possible, but high enough that most workers could keep a roof over their heads, the lights on in their homes, and some food on the table for themselves and their families until they recover. Broadly speaking, there are two kinds of disability insurance policies:

Short-term disability – for events that disrupt income for less than 90 days
Long-term disability – covering benefits for a longer period of time

  • Advantages of Group Coverage
  • Group disability coverage has advantages for both the employer and the workforce. Advantages to the employer include:
  • Reduced costs compared to offering individually underwritten policies to everyone
  • Increased employee loyalty – especially after someone in the workforce has a claim and word gets out that these valuable benefits kicked in
  • Tax deductible premiums
  • Easy, streamlined administration
  • List billing

Advantages of group disability insurance to the worker include:

  • Affordability – the employer subsidy makes it possible for workers to get coverage they would be unable to get on their own
  • Pre-existing conditions that would make it impossible for employees to get coverage as individuals may be waived in a group plan
  • Streamlined application process with no medical exam required
  • No prior year tax returns or income verification are required; employer reports income information to the disability insurance carrier

In addition, some policies are portable. If the employee leaves the company, he can sometimes keep the policy, though he loses the employer subsidy. Portability is an important feature, because disability insurance can be difficult to qualify for on the individual market.

Disadvantages of Group Disability Insurance

All coverages have both advantages and disadvantages. Some of the disadvantages include:

  • Less flexibility – managers and supervisors may have different needs and risk profiles compared to rank and file employees
  • Less coverage – some workers may be able to get more robust plans on the individual market than carriers offer via group plans
  • Benefits are taxable to the recipient
  • More restrictive definitions – with disability insurance policies, the definition of the word “disability” in the contract itself is of paramount importance. For example some policies, known as “Own Occupation” policies, pay benefits if you cannot work in your own profession. Other policies will not pay benefits if the worker can work in any occupation.
  • All things being equal, “Own Occupation” policies are preferable – but they tend to have higher premiums, and are less prevalent in the group disability insurance market.

Taxation of Disability Insurance

Group term premiums are generally deductible to the business as a business expense, just like any other wage expense. The value of the premiums, however, is not usually taxable as income to the worker. Disability insurance benefits may or may not be taxable, depending on the circumstances. Generally, if the recipient didn’t pay taxes on the premiums, then the benefits are taxable as ordinary income. This is true for most employer-paid group health insurance plans. If the employee paid part of the premiums, then a similar percentage of benefits will be tax-free.

At Cleary, we know how important a comprehensive benefits package can be to your continued success. Give us a call today at 617-723-0700 and we will work with you to create a plan that meets your business objectives, takes into account state and federal laws, and capitalizes on incentives and innovative solutions now being offered.