Disability income insurance is insurance coverage that typically pays the insured a portion of his regular pay in the event of inability to work due to off-the-job injury or illness. In the United States, this sort of insurance is most often purchased by businesses and included in their employees’ compensation packages, together with life and health insurance. The premiums paid for disability income insurance may be absorbed by the employer, passed on entirely to the employees, or shared in some manner.
Employer-provided disability income insurance is usually short-term in nature, rarely extending beyond 12 months, and isn’t intended to pay the costs of treatment. Instead, it’s designed primarily to protect the employee’s income while unable to work, although most plans’ benefits are only a portion of the insured’s wages or salary. Participation in such a plan is usually a condition of employment with those employers who offer it, but it's legally required only in a handful of states. When workers are unable to work due to on-the-job illness or injury, both the cost of treatment and income replacement are covered by workers’ compensation programs, which are mandatory nationwide.
Other types of disability income insurance include some designed to pay high-income workers up to 100% of their lost pay, and others that pay the employer when a key employee is disabled. Another type, often taken out by small business owners, is designed to pay the business’ bills while the owner is disabled. In addition, those whose employers don’t offer any disability income program sometimes take out disability income insurance on their own.
Disability income insurance policies often have a waiting period, generally a week or two, when the employee cannot work, but doesn’t collect benefits under the policy. The longer this period, the lower the premium for disability income insurance. A waiting period is also seen as a cost containment tool, with the idea that waiting periods discourage malingering. Disability programs with waiting periods often work in conjunction with an employer’s own sick leave policies, so that pay during the waiting period is covered by the employee’s accumulated sick time.
Disability income insurance plans, though, generally don’t pay the employee’s full pay; to the contrary, it’s rare for such plans to pay more than 80%, and most pay around 60%. They’re specifically designed to help the insured pay the bills than to lead a carefree lifestyle, which is what makes them attractive to employers. Many companies can’t afford to provide income to non-working employees, but want them to be able to meet their basic expenses while out sick.
Longer-term disability programs — those lasting more than 12 months — generally aren’t offered by employers. In industrialized nations such as the United States and the United Kingdom, the responsibility for providing income to the long-term disabled generally falls to a national social insurance program, such as the US Social Security program, or National Insurance in the UK. The Social Security program only provides disability income for participants under age 65 whom it certifies as totally and permanently disabled, and applicants frequently must enlist the aid of legal counsel to help them navigate what’s often a long and bewildering process.