When you’re injured or take ill and can’t work, your entire life can come unraveled. Your bills don’t stop piling up, you may have extra medical care expenses on top of it, and you don’t have any usual earnings coming in.
That can take you from living comfortably and enjoying the fruits of your labor, to being in a sort of financial purgatory.
Luckily, it doesn’t have to be that way, and there are two main tools available to help an injured worker stay financially stable if you’re not able to work due to an injury or illness.
These options are disability insurance and worker’s compensation plans.
The two are often confused with one another, and many people don’t understand the purpose of each option or how they work.
So, this guide is going to outline the difference between disability insurance and worker’s compensation plans in order to help you figure out the right route to take as you prepare for the possibility of wage loss due to being unable to work at some point in your career.
What is Disability Insurance and Worker’s Compensation Meant for?
Disability insurance and worker’s compensation both have similar goals. They’re designed to help people maintain their financial state when they are unable to work due to something out of their control happening.
However, they dramatically differ in their execution.
What is Disability Insurance?
Individual disability insurance is a form of private insurance that provides disability benefits on the basis of the fact that you’re unable to work due to a condition covered in the policy you purchase.
This is paid for by you in the form of out-of-pocket premiums, and when you meet the requirements to use your benefits, you make a claim on your policy. It’s at this point that you start receiving your monthly benefits.
However, work-related disability insurance is a little more complicated than that, because it comes in two varieties: both short-term and long-term disability plans.
Long-Term Disability Insurance:
Long-term disability insurance policies are the type of compensation programs that are meant for long-lasting afflictions, disabilities and medical conditions.
Per most policies, this means any qualifying disability lasting longer than a year. If you’re diagnosed with an illness or injury that will not cease within one year, you make an insurance claim.
Once you make an application, it may take a full year to receive any benefits. There’s a way to get help during the approval process, but we’ll talk about that later in the guide.
Once you complete a claim form and get an initial approval, your long-term disability benefits will typically last the duration of your disability.
This means if you suddenly become disabled and have a long-term disability insurance policy, you can receive your benefits for the rest of your working life. However, they are not permanent disability benefits.
Your benefits will cease once you’re medically cleared to work—if you have a disability that can be cured—or if you reach the age of retirement. For the time being, that age is 65, but it is adjusted regularly to accommodate longer lifespans and workforce factors.
Upon reaching retirement, you are typically expected to implement your retirement plan.
Definition of Long-Term Disability
Here are some of the many disabilities typically covered by long-term disability insurance. Of course, individual policies will vary, with some key differences, so you should always read the fine print.
- Cancer: Cancer is covered by disability insurance when the symptoms prevent you from carrying out your normal job duties.
- Pulmonary Issues: Diseases and health conditions affecting breathing can qualify as a recognized disability if your breathing issues are bad enough to prevent you from working.
- Cardiac Issues: If you suffer a massive heart attack and require a long time to recover, or if the event damages your heart to the point it is no longer safe to work, you can claim your disability insurance.
- Blindness and Deafness: Blindness and deafness are both covered by long-term disability.
- Injury: While most injuries, including broken bones, heal within a few months, some take years. The longer-lasting injuries are covered by long-term disability insurance.
- Chronic Pain: Chronic pain is on the rise, and it can render you debilitated and unable to work again. This is also covered.
How Much it Costs and Pays:
Long-term disability isn’t typically too expensive. It usually costs 1%-3% of your annual income. So, if you make an average of $40,000 annually, you can expect to pay around $1200 for a year of coverage ((1)). This is an out-of-pocket expense, but it’s worth considering since it can pay you returns of 50% to 90% of your income if you end up making a claim ((2)).
Short-Term or Temporary Disability Insurance
Short-term disability is a lot like long-term disability. It provides benefits to people who are covered when there is a short disability period of time that prevents you from working, and it costs around the same amount. However, it’s only designed to cover your income for short-term disabilities.
In official terms, this means it covers people with disabilities for anything from two to six months, but there is a way to have your benefits extended. If you remember in the long-term disability section it was stated that it can take a year for long-term disability benefits to be approved once you make a claim.
Well, if you have both policies, you can use short-term disability for up to 52 weeks, or one year, to cover your income while you wait for your long-term disability to be approved.
This makes short-term disability a worthwhile option to consider because it can also be used in much more serious and long-lasting situations as a way to protect your financial state while you wait for long-term benefits.
Also, the disabilities covered are a bit different than what you see with long-term disability. Rather than covering things that can affect your life for years, most of the conditions covered can be recovered from within a couple of months.
Definition of Short-Term Disability
Let’s take a look at the various conditions short-term disability insurance benefits can cover.
Some illnesses, such as Covid-19, can keep you out of work for months. Short-term disability coverage can be claimed and disability payments start within two weeks to keep your financial life from spiraling out of control or prevent you from losing all your savings due to a lack of income. This benefit will kick-in even if you’re not hospitalized due to the condition. You just have to be prevented from working.
If you can work your desk job with a broken toe, you likely won’t get approved for temporary disability benefits. However, breaking your leg, both your arms or something else can keep you out of work, and the recovery time is usually months. This is another area where short-term, temporary disability payments can help.
Yes, pregnancy counts as a period of disability when filing a short-term disability claim. Not every disability has to be a negative thing. It just has to keep you from working.
This unique benefit of short-term disability insurance can be crucial if you work somewhere that doesn’t offer paid maternity leave, or you otherwise can’t take time off without facing financial ruin.
While the short-term disability benefits will only last six months, that will cover two out of three trimesters. Also, if you can work for most of the first trimester, take any paid time off you’ve accrued, and THEN use your short-term disability policy. This way, you can take the majority of your pregnancy off and potentially have time left over to heal; all without losing a lot of income.
How Much Does It Cost and Pay?
Short-term disability insurance pays 50% to 90% of your lost income—the exact amount will vary depending on the person and policy ((3)).
As mentioned, short-term disability also typically costs about the same as long-term disability premiums. This is between 1% and 3% of your annual income ((4)).
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Worker’s compensation payments aim to achieve a similar goal as disability insurance—by protecting your income in the cases of workers suffering an occupational injury or developing a medical condition due to the work environment. However, it’s very different in how it works.
Whereas disability insurance covers you regardless of what caused the job injury or illness, worker’s compensation coverage focuses on job-related injury and illness.
This means something such as having a pallet fall and break your leg at the warehouse you work in, or if a co-worker hits you with a forklift. If it’s a work related injury, or you catch a seriously debilitating illness at work, worker’s compensation will cover the income you lose.
Unfortunately, you won’t get any worker’s compensation benefits if you have a car accident on the way to work, develop a terminal illness in a way that’s not provably related to work, or anything else that isn’t your employer’s responsibility. Worker’s compensation only gives financial assistance to the injured or disabled employee if they are injured or disabled at work.
Your employer can, and probably will try to avoid responsibility as well. You will likely have to produce a medical report and complete a compensation claim form that will go to a workers’ compensation board for approval. After all, the benefits for people that worker’s compensation pays is as much as 60% of their wage replacement without them having to work ((5)).
How is Worker’s Compensation Paid?
Unlike disability insurance, worker’s compensation is not private insurance that you buy on your own, as your employer is the provider. This is both a good and bad thing.
On one hand, you do not pay out-of-pocket premiums. Your employer pays the cost of eligible employees’ compensation insurance. This gives you coverage if you’re hurt at work, and you don’t have to worry about premiums—but you also don’t have the policy yourself. It’s tied to your work, and it’s not going to follow you around if you change employer.
How Long Does Worker’s Compensation Last?
Worker’s compensation is different to disability insurance as there’s only one general form of it, and it covers both short-term and long-term injuries you experience at work.
Once you’re medically approved for a worker’s compensation claim, you will receive your benefits for the duration of your recovery. If that’s six months, then you’re paid for six months. If it’s a year, then you’re paid for a year.
The amount you’re paid and how long you’re covered depends greatly on whether your injury is classified as temporary, permanent, full, or partial. A partial impairment is when you can still work, but you have to take a cut in wages due to a lesser position or fewer hours because to your disability.
You will only be eligible for a permanent disability, in which you will never work again, if you are on worker’s compensation benefits for at least 104 weeks, or two full years. Then, your case will be evaluated and you may receive permanent cash payments in place of earnings.
You may also choose to settle if you no longer work for the employer you’re filing the claim with. This is when your benefits cease, but you’re paid a lump settlement sum. It’s similar to when someone sues a large company and they decide to settle rather than go to court; except, it’s not quite as negative.
As you can see, worker’s compensation adapts to your needs. Whereas disability insurance requires two different policies to cover every type of situation possible.
This is one benefit of the disability insurance vs workers compensation debate. ((6))
Disability Insurance vs. Workers Compensation: Which is Best for You?
Both of these forms of insurance are necessary for making sure you’re financially protected in case of a serious health issue or impairment that prevents you from working. However, they both work very differently.
Just because a worker’s comp claim is paid by your employer, it doesn’t mean you should rely on only that. You will also want to look at a private disability policy to ensure that you’re covered for disabilities that develop outside of the workplace.
Navigating the complicated insurance market can be extremely difficult, and it’s not recommended to do it on your own.
If you’re looking for a disability insurance policy to complement your work-provided workers’ compensation coverage, contact Policy Solver.
Policy Solver has the insurance carrier network and consultation professionals necessary to evaluate your needs and financial capabilities to find the perfect insurance policy for you regardless of which type of insurance you’re looking for.
Don’t navigate the insurance world alone. Contact Policy Solver, today.
1: Taken from Life Happens, 02/19/2022, https://lifehappens.org/disability-insurance-101/how-much-does-disability-insurance-cost/
2: Taken from Nolo, 02/19/2022, https://www.nolo.com/legal-encyclopedia/how-much-does-long-term-disability-pay.html
3: Taken from Growing Family Benefits, 02/19/2022, https://www.growingfamilybenefits.com/short-term-disability-pay/
4: Taken from Trusted Choice, 02/19/2022, https://www.trustedchoice.com/disability-insurance/group-disability-insurance/voluntary/short-term-cost/
5: Taken from The Hartford, 02/19/2022, https://www.thehartford.com/workers-compensation/how-to-calculate-cost
6: Taken from The Hartford, 02/19/2022, https://www.thehartford.com/workers-compensation/how-long-workers-comp-last