Disability insurance for small businesses provides income in a situation where a business owner or employee is unable to work due to an illness or injury that occurred away from work. If an illness or injury keeps someone from working for an extended period, disability insurance provides financial assistance to replace a portion of lost income.
This type of coverage is typically available through employer – provided or voluntary employee benefits. Small business insurance can also provide disability benefits with a workers’ compensation policy if an employee becomes disabled after a work – related injury or illness.
Benefits of Being Covered By Disability Insurance
In the United States, there are so many good reasons to have individual disability insurance to replace your income should you become injured. However, if you own a business, it is not just about you. Note that as a business owner, you are more or less the primary driving force of your business, as well as the bankroll.
When you are planning for your business, one contingency you need to include is what would happen if you get sidelined. Even though Disability insurance for small businesses is not normally a government requirement, businesses that operate in California, Hawaii, New Jersey, New York, or Rhode Island are required to provide employees with short – term disability insurance.
In addition, if you have employees, most states in the United States will mandate you to carry workers’ compensation insurance, which provides benefits for work – related disabilities. Workers’ compensation requirements tend to vary by state.
Table of Content
Who is Eligible for Disability Insurance?
To prove eligibility for disability insurance, the policyholder is expected to meet the policy’s definition of disability. Two common definitions are own occupation and any occupation. Own Occupation simply means if you can’t perform the duties of your regular job, you will be considered totally disabled and eligible for benefits. Note that this doesn’t entail that you have to be bedridden, just that you can’t perform your regular duties.
Meanwhile, Any Occupation means if you can’t perform the duties of any reasonable job that would typically be suitable for you, you will be eligible for benefits. If you are able to work part – time in your normal job or in some other comparable field, you won’t qualify for your full disability benefits. But note that you still might be able to receive a partial benefit.
However, once you are eligible, you still have to fulfill an elimination period (or waiting period) before receiving your first disability income check. Note that the longer the wait you selected, the less expensive your disability insurance policy will be.
Additionally, immediately your disability benefit payments begin, they will last until the end of the benefit period. Also note that this will depend on the type of Disability Insurance you acquire. Owing to that, there are four main types of disability insurance: short – term disability (STD), long – term disability (LTD), Social Security disability insurance (SSDI), and workers’ compensation.
4 Types of Disability Insurance for Small Business Owners
1. Short – term Disability Insurance
STD insurance is insurance that pays you a portion of your income for a short period of time after you run out of sick leave (STD typically lasts less than 1 year). However, depending on your plan, this insurance will more or less pay you after a waiting period (also referred to as the elimination period in contracts).
This period of time is usually 1 – 7 calendar days from the date of illness or injury. STD benefits are paid weekly and the duration is typically between 13 – 26 weeks. STD coverage does not typically cover work – related injuries. Short – term disability features include:
- Benefit duration: Three to six months
- Elimination period (or waiting period): 14 days or less
- Benefit amount: Up to 80% of gross monthly earnings
- Source of coverage: Often provided as an employer – provided benefit or purchased independently. Mandatory in some states.
2. Long – term Disability Insurance
LTD insurance is insurance that starts once your STD benefits and employer – granted sick leave has been used up (LTD typically lasts more than 6 months). Note there is usually a 90 or 180 day waiting period, which can be covered by STD if you have a policy in place. The duration of the benefit also varies, but it tends to provide coverage until the employee returns to work, is no longer disabled, or reaches Social Security retirement age. Long – term disability features include:
- Benefit duration: Two years, five years, 10 years, or until you retire
- Elimination period: 30 to 720 days, often 90 days
- Benefit amount: Up to 60% of gross monthly earning
- Source of coverage: Employer – provided benefit or directly from an insurer
3 Social Security Disability Insurance
Social Security Disability Insurance (SSDI), a very crucial part of Social Security, provides modest but vital benefits to workers who can no longer support themselves owing to a serious and long – lasting medical impairment. According to reports, about 8.5 million people receive disabled – worker benefits from Social Security. Payments also go to some of their family members: 117,000 spouses and 1.5 million children.
Note that SSDI benefits are financed primarily by part of the Social Security payroll tax and totalled about $144 billion in 2018. Accordingly, this is less than 4 percent of the federal budget and less than 1 percent of gross domestic product. Employers and employees each pay an SSDI tax of 0.9 percent on earnings up to Social Security’s tax cap, currently $132,900.
Note that this program’s financial transactions are handled through an SSDI trust fund, which receives payroll tax revenues and pays out benefits and which is legally separate from the much larger Social Security retirement fund. Social Security disability features include:
- Benefit duration: For as long as your disability lasts
- Elimination period: Six months
- Benefit amount: Based on average lifetime earnings
- Source of coverage: Available to U.S. citizens who’ve paid into Social Security
Workers’ compensation insurance covers medical costs and lost wages for work – related injuries and illnesses. Note that this policy is mandated by law in almost every state for businesses that have employees.
Even when not mandated by law, this policy provides important protection against medical expenses and employee lawsuits related to workplace injuries. You can rely on workers’ comp if an employee needs medical care or time off due to a workplace injury – or if an injured employee sues you for failing to prevent an accident.
However, if you don’t carry workers’ comp, your business will be responsible for any medical bills and legal fees. And most states levy costly penalties for noncompliance. Also note that each state has unique laws and penalties for workers’ comp.
In most states, workers’ comp is required as soon as a business hires its first employee. Other states don’t mandate coverage until a business has two, three, four, or more employees. Texas is the lone state where business owners are never required to purchase workers’ comp.
Buying disability insurance for your small business should not be based on premium price alone. Finding the best plan for your business will require a thorough look at the options essential for your circumstances and budget. As a small business owner, it is always advisable to find a good insurance broker or agent who will help you find the best policy for your needs and help steer your business through the maze of disability insurance options.