A workforce is a business’s most important asset. Workers’ compensation insurance and disability insurance are both methods of worker protection, but they’re not exactly the same thing. In this blog, we’ll explore workers’ compensation vs. disability insurance and compare and contrast these two types of insurance. We’ll also provide some examples as to why small businesses should offer both to protect the long-term interests of their employees and their business.
What Is Workers’ Compensation?
Workers’ compensation is an insurance policy that offers benefits to employees who have been injured or become ill as a result of their job. It’s a state-regulated program that provides monetary resources to employees while they recover from their injuries. In exchange for accepting workers’ compensation, the employee foregoes the right to sue the employer for purported negligence.
Workers’ compensation programs can be funded in three different ways:
- Self-funded plans. Employers pay their own expenses and are responsible for paying out any claims. This can be risky if you have a high number of employees or frequent workers’ compensation claims.
- State-funded programs. In some states, there is only one provider of workers’ compensation benefits. These types of programs are called “monopolistic”. The employer pays premiums into the state fund and receives coverage through it.
- Insurance-funded plans. Employers purchase workers’ compensation insurance from an insurance company and pay premiums based on factors such as industry type, employee salary, and loss history.
What Is Covered Under a Commercial Workers’ Compensation Insurance Plan?
While different types of workers’ compensation insurance may vary slightly, every standard plan will typically cover the following:
- Medical care. An employer or its workers’ compensation insurer pays for medical treatment related to an employee’s work injury. This includes doctor’s appointments, physical therapy, medications, hospital stays, and any other care as prescribed by a doctor.
- Lost wages. If an employee’s doctor says they can’t work while recovering from an injury or illness, workers’ compensation will provide temporary disability benefits to replace some of the employee’s lost income. The percentage varies by state, but most states base it on a formula that takes into account what the employee earned before the injury or illness.
- Death benefits. If a worker dies from a work-related injury or illness, his or her survivors may be eligible for death benefits to cover burial expenses and other costs. Usually, the amount is based on the worker’s average pay.
Workers’ Compensation Insurance and Job Disability
If an injury leaves an employee with a permanent impairment, such as a loss of function in a body part, workers’ compensation may provide additional benefits to compensate for the effect on the employee’s earning capacity. Work-related disability typically falls into the following categories:
- Temporary total disability benefits. These are paid when an employee is unable to work at all due to a work-related injury or illness. The amount of these benefits varies from state to state.
- Temporary partial disability benefits. These are paid in situations where an employee has returned to work on a part-time basis and earns less than they did before the injury or illness occurred. The amount of these benefits also varies from state to state.
- Permanent disability benefits. These are paid if an employee suffers permanent impairment because of a work-related injury or illness and can no longer return to their previous job. This coverage is sometimes broken down further into permanent total disability and permanent partial disability insurance.
What Is Disability Insurance?
Differing from workers’ compensation, disability insurance — also known as “income protection” or “salary continuance” — is another form of coverage that can supplement workers’ compensation to protect employees. One major difference between the two is disability insurance is not required by law and employers are generally not legally obligated to provide it to employees.
What Types of Disability Insurance Are There?
There are two main types of disability insurance: short-term disability and long-term disability. Short-term disability plans typically cover 60% of an employee’s income for around 3 months to 1 year, while the benefit of long-term disability insurance is that it covers longer periods, such as 5 years or until retirement age.
What Does Disability Insurance Cover?
Disability insurance covers injuries and illnesses that limit an employee’s ability to work. Another important distinction between disability insurance and workers’ compensation is that disability insurance covers injuries and illnesses that happen off the job and off the clock.
While some may think the importance of disability insurance is reserved for a rather small minority of people, more than 35% of today’s 20-year-olds will experience a disabling event that will prevent them from being able to work for at least three months. The Council of Disability Awareness reports that 90% of claims filed for long-term disability stem from medical illnesses, including – but not limited to – the following:
- Back pain
- Heart Disease
As a business owner, an unexpected injury or illness to an employee can have a huge impact on your organization. The costs of medical treatment, hiring a temporary replacement, and the loss in productivity can range from a minor inconvenience to a major problem. The same is true for an employee. By offering an employer-sponsored disability plan, you can help your employees feel safe, valued, and protected.
What’s the Difference Between Disability Insurance and Social Security Disability Insurance?
A private disability insurance plan may offer more benefits than Social Security Disability Insurance (SSDI). In addition, eligibility requirements may be less strict. In order to qualify for SSDI benefits, you must have a total disability.
As a result, if you are suffering from a temporary or partial disability (when you can still perform some work), you will not be eligible for SSDI benefits. A claimant must also wait at least five months until they become eligible for SSDI benefits due to the elimination period.
Workers’ Compensation vs. Disability Insurance
Is there a difference between workers’ compensation and disability insurance? Yes. But when properly structured in a commercial insurance plan, workers’ compensation and disability insurance work together. By offering a comprehensive employee benefits plan, you better ensure your employees feel taken care of, which in turn creates a more productive and fulfilling work environment.
With this in mind, it’s still important to summarize and highlight some of the key differences between the two types of coverage. This will help you get a better understanding of how each type of coverage can complement the other:
- Workers’ compensation is covered by an insurance policy provided by the employer. In contrast, disability benefits are usually paid through an employee’s health insurance or social security disability insurance.
- Employers are responsible for workers’ compensation when an employee is injured on the job. Meanwhile, disability insurance pays for injuries that keep an employee from working but aren’t necessarily related to work.
- In general, benefits from a workers’ compensation insurance plan last longer. Temporary disability payments, for example, are paid until one attains maximum medical improvement (at which point a lump sum may be offered to represent permanent disability). In the private sector, short- and long-term disability benefits only last 26 to 52 weeks, but federal disability benefits could last even longer.
- Benefits from workers’ compensation are tax-free. Benefits from disability insurance are taxed.
- After you return to work, workers’ compensation payments will continue at a partial rate. As soon as you return to work, your SSDI benefits and private benefits are usually halted.
- No deductibles or limitations apply to workers’ compensation health benefits related to occupational injuries and illnesses. In group health plans with private disability plans, medical bill payments are usually limited. SSDI will in some cases cover medical expenses, but there are several additional hurdles.
- Workers’ compensation coverage begins immediately after your injury/ illness. Usually, private disability will as well, but SSDI benefits require an extensive application process, and usually, applicants will endure several appeals before final approval.
- Workers’ compensation benefits are determined by the law. Private disability insurance is going to depend on the type of policy.
Does a Business Need to Have Workers’ Compensation?
Workers’ compensation is mandatory in the United States. The modern system of workers’ compensation was first enacted in the U.S. by the state of Wisconsin in 1911, with Mississippi being the last state to jump on board in 1948.
These laws required employers to provide medical and wage replacement benefits for injured workers. In exchange, the injured employee could not sue the employer. Today, workers’ compensation functions in essentially the same manner.
What Is the Law Concerning Workers’ Compensation and Disability Insurance?
An employee may receive both workers’ compensation and disability insurance at the same time. Since these are two separate entities, receiving one does not disqualify an employee from receiving the other. However, the amount a person collects from both workers’ compensation and disability insurance benefits cannot exceed more than 80% of the previous income they were earning.
Why Should a Business Offer Both Workers’ Compensation and Disability Insurance?
The National Safety Council reports that 1 in 3 American workers believe their employer values productivity over safety. The truth is, neither of them can function successfully without the other.
A study from Science Direct found that physical and psychosocial conditions at work directly impact worker safety, health, and well-being and “influence enterprise outcomes such as turnover, absence, productivity, and healthcare costs.” A Gallup report found that businesses with a high level of psychological safety help make employees more engaged. The report even found that this mutual feeling of trust and respect can increase employee productivity by 12%.
The data is clear that businesses that invest in their employee’s health and wellbeing end up increasing productivity and decreasing turnover within the company.