January 29, 2018

One in four of today’s 20-year-olds will become disabled before they retire, according to the Council of Disability Awareness.

Sometimes the disability is work-related, but disability can occur as a result of any number of diseases, life events and accidents. And too often workers are woefully unprepared for them. For employees it’s critical to understand the difference between disability insurance and workers’ compensation.

Important Points About Disability Insurance

Disability income insurance is designed to protect the insured’s income in the event he or she becomes disabled and unable to work. Disability insurance can be purchased directly through an agent or broker, or employers can provide coverage to their workers as an employee benefit.

In the event the insured becomes unable to work because of an accident or mental or physical illness, the disability insurance policy would kick in after a period of time (known as the “exclusionary period,” during which the disabled individual must live off of savings or other funds). Typically, the policy will pay between 50% and 70% of the insured’s income before the disability, depending on the policy limit and how much protection was bought.

Of key importance in a disability insurance contract is the definition of disability. Some policies will take effect if you become so disabled that you cannot work in any occupation. Others will take effect and pay benefits if your disability prevents you from continuing to earn a living in your own profession or occupation.

The latter policies, commonly called own-occupation policies, are more valuable, because they are much more likely to pay benefits than any-occupation policies. However, premiums are higher.

The benefits will last until you are medically able to return to work, for a set number of years specified in your contract, or until age 65.

Disability that Occurs at Work

Workers’ compensation, on the other hand, is designed to protect workers from injuries that occur on the job, even if a worker doesn’t have private disability insurance. If an employee is injured during the course of employment, workers’ compensation kicks in to pay medical bills and a portion of the workers’ pre-injury income. The exact amount varies by state, but is commonly defined as a percentage of income, up to a weekly or monthly maximum established by the state.

State governments generally require all employers to carry workers’ compensation insurance for employees. However, they don’t have to carry it to cover independent contractors. If you receive a 1099 rather than a W-2 from the company, chances are you are not covered under any workers’ compensation policy.

Workers’ compensation insurance protects workers and employers alike. Individuals covered under workers’ compensation policies can be assured that there are enough financial resources for them to be protected, even if the employer is very small or becomes insolvent and goes bankrupt. They can also get benefits quickly, as there is no need to sue for them. In return, workers generally give up the right to sue employers for medical bills and lost income.

Need Specific Answers?

If you have additional questions about what workers’ comp covers and what requires disability coverage, your workers’ comp agent should have those answers.

© 2018