Why You Should Never Skip Employer Disability Insurance
July 23, 2018
Johnathan White had been coaching college volleyball for eight years when a collision at practice left him with two broken legs requiring surgery. What was expected to be a routine medical procedure became complicated, and it was four weeks before Johnathan was released from the hospital, with instructions to recover at home for another two more weeks.
Rachelle Gerstner was also placed on bed rest after complications to her pregnancy threatened the life of her unborn child. After four weeks, she underwent a C-section and faced another six-week recovery time following the delivery of her son.
How did Rachelle protect her financial stability when Johnathan did not? Although neither of their medical conditions could have been foreseen, they could have been planned for.
The Financial Difference
When both Johnathan and Rachelle were hired by their respective employers, each sat down with a human resources representative and discussed the health, life, and disability insurance benefits offered by the company. Rachelle, expecting she might wish to begin a family during the course of her employment, opted into the short-term disability plan she was offered, thinking she would need the 60 percent of her salary during the unpaid portion of her maternity leave.
Johnathan, on the other hand, decided against enrolling in the employer disability insurance as he was being asked to pay a portion of the premiums himself. As a young and healthy adult male, he had no expectations of impending disability—neither short nor long term. It turned out, however, that after two weeks in the hospital, Johnathan ran out of paid sick and vacation time. Since it would be another month before he could return to work, Johnathan was forced to dip into what little savings he had to pay his mortgage and other bills and soon went into debt as his medical co-pays stacked up.
Many employers offer some form of short and long-term disability insurance. Often, these plans are available to employees at a reduced premium, although a diminishing number of companies still offer to cover the premiums as part of an employee’s benefits package. Smartmoney.com indicates that these plans usually will pay up to 60 percent of an employee’s regular salary (excluding bonuses or commission) for a limited time.
That’s how much Rachelle received, and it began as soon as she was ordered to bed rest and lasted until the day she returned to work. “I had used up all my sick time earlier in my pregnancy,” she said, “and I would have lost my apartment if I’d had to go two and a half months without pay. It was such a relief to have those disability checks come in.”
Short Term Disability
The insurance plan that kicked in to pay part of Rachelle’s salary was the short-term disability that she enrolled in. Short-term disability is available as soon as an employee becomes disabled or goes on sick or maternity leave. Coverage can range from a few weeks to an entire year. Salary.com cites five states that require employers to offer short-term disability insurance: California, Hawaii, New York, New Jersey, and Rhode Island.
As stated earlier, the typical plan covers just a percentage- usually around 60 percent- of an employee’s regular salary, so high-income earners or those who could not survive on the amount offered may consider buying an additional, say 10 or 20 percent, rider for a small premium. Plenty of plans also offer employees a tiered benefit, one that covers an employee on disability at 100% regular salary for a couple of weeks before going down to that typical 60 percent.
One in four 20-year-olds will eventually face a disabling illness or accident that will keep them out of work for more than ninety days. Without insurance, they’d face three months without pay, and who in this economy can afford that?
Long Term Disability
Long-term disability begins where short term disability falls off. Long-term coverage usually requires a waiting period of six months or so before payments can be made, and unlike those states requiring short term insurance, there is no national or state mandate for a long-term disability plan.
Most people who refuse to enroll in a long-term disability plan do so because they believe that Social Security will kick in. The problem with this assumption is that, according to the Wall Street Journal, applicants are usually rejected the first time they file for Social Security disability benefits, extending the time a person faces without income.
Johnathan shudders at this idea, “I got lucky,” he says, “because the doctors told me my recovery time could easily have taken months, rather than weeks. As it was, I was so desperate to pay bills that I returned to work ahead of schedule. A six month disability claim would have bankrupted me.”
Often, short-term disability insurance is included in an employee’s benefits package, while long-term plans are offered at an additional premium. These premiums are usually between one and three percent of an employee’s monthly salary, a small price to pay for peace of mind and financial stability.
We can’t say it better than Johnathan did: “I signed up for my employer-offered plans as soon as open-enrollment began. Yeah, it cost me some take-home pay each month, but I couldn’t risk another extended leave without income.” Could you?