Workers' compensation insurance can provide many benefits for employees who sustain injuries or illnesses from their jobs. For employees who suffer permanent and lasting effects from these work-related injuries, workers' compensation can also provide permanent disability benefits. However, workers' comp is not exactly the same as disability insurance, which is another essential coverage.
A local independent insurance agent can help get your business set up with all the workers' comp and disability insurance it needs. They'll ensure your company gets matched to the appropriate policies with sufficient coverage limits. But first, here's a closer look at the differences between workers' comp and disability insurance.
Key Takeaways - Workers' Compensation Insurance vs. Disability Insurance
- Workers' compensation insurance can pay for expenses related to work-related employee injuries, illnesses, and fatalities.
- Disability insurance can cover ailments that aren't caused by someone's job, though it can also cover work-related issues.
- Both workers' comp and disability insurance can provide partial wage replacement for affected individuals who must miss work for an extended time.
- Workers' compensation is often required by law, while disability insurance is typically voluntary coverage.
- It's strongly recommended to work with an independent insurance agent, as they can help your business get set up with the right type of policy tailored to its unique needs.
What Is Workers' Compensation Insurance?
Workers' comp is an essential business insurance coverage that can pay for several expenses stemming from work-related injuries and illnesses to employees. Policies can cover the following expenses:
- Lost wages
- Medical treatments
- Rehabilitation
- Disability benefits
- Death benefits
- Hiring costs
Workers' comp can replace up to two-thirds of an employee's typical pay if they must miss work to recover from a covered accident. This coverage can also reimburse the business for hiring costs if they must replace an employee who can no longer work due to a covered incident. Additionally, if an employee dies due to their job, workers' comp can provide death benefits to a beneficiary.
What Is Disability Insurance?
Disability insurance pays a portion of an injured worker's earnings if they cannot perform job duties due to an illness or injury. However, in contrast to workers' comp, which only covers job-related injuries and illnesses, disability insurance covers ailments that aren't related to the job, too. Further, unlike workers' compensation insurance, employees pay an insurance premium toward disability insurance through an employer-sponsored benefit plan.
There are two major types of disability insurance. Short-term disability insurance can provide benefits for a period between three and six months. Often, short-term disability coverage is covered by employers through a group insurance plan that requires employees to pay a portion of the premiums.
Long-term disability insurance can provide benefits for multiple years. Some employers offer this coverage, but individuals usually buy it through private insurance companies.
What Do Disability Insurance Benefits Cover?
Disability benefits provide compensation to employees who suffer injuries or illnesses. They typically pay a portion of wages until the employee can return to work, or for future medical care and lost wages that an individual experiences after injury or illness. The extent to which an employee is compensated for their injuries depends on the extent and classification of the injuries.
Limitations to Workers' Comp and Disability Insurance
In most cases, neither disability insurance nor workers' compensation pays for intentional or self-inflicted injuries. Workers who take time off for injury, illness, or otherwise do not receive their full salary.
Generally, a worker is paid two-thirds of their salary while they recover, though in some cases, disability insurance benefits pay less than 50% of a worker's salary. These policies typically won't cover incidents that occurred while a worker was intoxicated or failing to comply with workplace rules and regulations, either.
Disability Insurance vs. Workers' Comp
You may have wondered, "Are workers' comp and disability insurance the same thing?" Though these policies are similar, they do have certain key distinctions.
Workers' comp is specifically designed to cover work-related injuries and illnesses. It can also cover disabilities that develop due to job duties over time. Typically, workers' comp coverage provides reimbursement without co-pays or deductibles taken out of the compensation.
Disability insurance can cover many other types of injuries and illnesses beyond those caused by workplace incidents or job tasks. Benefits from disability insurance can cover accidents that occur outside of work, as well as pregnancy complications, mental illnesses, and other kinds of diseases like muscular sclerosis or dystrophy.
Are Disability Insurance Benefits State-Specific?
The amount an employee can receive in disability insurance benefits varies by the state in which they are employed. Every state has different rules regarding disability benefits. This comes down to how a disability is classified and whether a worker is eligible for benefits under certain criteria.
What Are the Eligibility Requirements for Workers' Comp Disability Benefits?
To begin, eligibility for permanent disability benefits is determined by a doctor. During treatment, your doctor will determine whether the condition will improve or have permanent effects on employment.
Most states determine eligibility when an individual reaches maximum medical improvement (MMI). Once reaching MMI, doctors will perform an examination to determine whether the injuries have left a worker with any permanent restrictions or limitations.
Suppose an employee suffered nerve damage in their arms after performing repetitive tasks at work over the course of many years. Even after undergoing surgery and physical therapy, they still experience pain and ongoing symptoms that prohibit their ability to work. In this case, their doctor would assign them a disability rating as a percentage. This percentage represents the degree of permanent limitation they have in their arms.
Depending on the nature of the injuries and their state’s laws, a doctor might designate the injured worker with a whole person impairment (WPI) rating instead. This is a common procedure when injuries involve the head, neck, back, organs, or internal systems. For example, a coal miner who is significantly limited in their respiratory function due to Coal Workers' Pneumoconiosis, or black lung disease, might receive a 50% WPI depending on the extent of their injuries.
How Are Permanent Disability Benefits Calculated?
Permanent disability benefits are often the most complicated workers’ comp benefits to calculate. Each state uses its own method for determining the amount of benefits, classifying disability as either partial or total, and for whether the disability is scheduled or unscheduled.
| Permanent total disability |
|---|
| A permanent and total disability is categorized as one that prevents the employee from working in any kind of gainful employment ever again. This category of disability is reserved for only the most serious and debilitating conditions, including the loss of both arms or legs or blindness. Permanent total disability benefits are usually paid at the same rate as temporary total disability benefits for the rest of the worker’s life. |
| Permanent partial disability |
|---|
| All other permanent disabilities that aren’t categorized as permanent total disabilities are considered partial disabilities. |
While permanent total disabilities are easy to categorize, permanent partial disabilities are classified as either scheduled or unscheduled losses.
Scheduled losses
A scheduled loss is a type of disability that appears on a list in the state’s workers’ compensation laws. State schedules typically involve disabilities of the extremities, including ears, eyes, legs, arms, feet, hands, toes, and fingers. Each body part is assigned a number of weeks’ payment or a dollar amount. For most states, the number of weeks is then multiplied by the worker’s disability rating.
As an example, suppose the state schedule assigns 80 weeks of benefits for the loss of a toe. If the employee's doctor gave them a 20% disability rating of the toe, they would receive benefits for 16 weeks. Some states provide a temporary disability benefit rate during this time, while other states use different calculations or a lower cap to determine how much a recipient will receive in disability benefits.
Moreover, workers with multiple scheduled losses can receive separate awards for each, depending on the state. Other states treat multiple disabilities as unscheduled losses and calculate compensation as a WPI.
Unscheduled losses and whole person impairment
In contrast to a scheduled loss, an unscheduled loss doesn’t appear on a state’s list and usually involves more complicated calculations. In these cases, some states compensate for these disabilities by using a WPI-based approach.
For example, a 100% WPI might be worth 500 weeks of disability insurance. If a worker were given a 50% WPI rating for a shoulder injury, they would only receive 250 weeks of insurance compensation.
Other states take different approaches to unscheduled losses. These states instead measure the worker’s actual wage loss due to impairment by comparing the difference between what the worker made before the injury and afterward. Other states measure the worker’s loss of future earning capacity in relation to several factors, including the worker's age, education, and training.
Workers' Comp vs. Disability Insurance Costs for Employees
Employees typically do not pay for workers' compensation insurance, as it's a coverage provided by the employer. However, they typically have to pay for disability insurance.
The average cost of disability insurance for employees is 1% to 3% of their annual income. Employees can also add riders to their policy for other types of disability coverage, such as long-term care and income guarantees to cover cost-of-living expenses. For these coverages, premiums tend to increase.
The average cost of workers' compensation insurance for the employer is usually tallied as a portion of their annual payroll, meaning employers pay anywhere from $.50 to $2.30 per $100 of payroll. For a smaller company with a $100,000 annual payroll, insurance premiums may be $500 to $2,300 per year.
The employer's industry plays a major part in the overall cost of workers’ comp. More hazardous industries typically require higher premiums for employers. Additionally, some industries may find it more difficult to find insurers to cover them at all. In this case, employers should seek out industry-specific insurers that specialize in underwriting these circumstances.
Is Workers' Comp the Same As Disability Insurance in Terms of Benefits?
Both workers' comp and disability insurance can benefit employers and employees in various ways. Having workers' comp can protect a business from the harsh cost of employee injuries, etc., as well as from related lawsuits. Providing workers' comp typically exempts a business from lawsuits filed against it by affected employees or their family members.
Having workers' comp also helps a business avoid state penalties for non-compliance. If a business were required to have workers' comp by state law but failed to offer coverage, it could be subject to state fines or forced temporary closures, and the business owner may even face a jail sentence.
While workers' comp is required for many businesses in most states with limited exceptions, disability insurance is only required by law in California, Hawaii, New Jersey, New York, and Rhode Island. So, not providing disability insurance won't result in penalties for businesses in most states.
However, offering this coverage can help a business attract new talent. Employees may choose to work for an employer that provides disability insurance in addition to workers' compensation over another company that offers similar pay but no disability coverage.
Offering disability insurance can also help your workers feel more confident that they could receive compensation for time lost from work due to injuries and illnesses that aren't necessarily caused by their jobs.
Benefit Durations and Limits for Workers' Comp vs. Disability Insurance
Workers' compensation benefits are often temporary and last only as long as necessary for an employee to return to work. However, benefits can extend to cover an individual permanently if they are never able to recover sufficiently to return to work.
Disability insurance benefits typically have more defined terms. Short-term disability insurance (STDI) benefits most often last between three and six months, but policies are available for shorter or longer durations. Usually, short-term disability policies won't last for longer than a year. Long-term disability insurance (LTDI) benefits have the possibility of an extended duration that can even last until retirement. However, common coverage durations for long-term disability policies are two years or five years.
Claims Process and Timing for Workers' Comp vs. Disability Insurance
Workers' comp claims are filed through the employer, since that's who holds the policy. Generally, workers' comp claims process faster than disability insurance claims, which are filed through the insurer directly and often require extensive documentation. This process can lead to a slower turnaround for compensation than with workers' comp insurance, but this isn't always the case.
Pros and Cons of Workers' Compensation and Disability Insurance
Both workers' comp insurance and disability insurance offer pros and cons to their coverage and benefits. The tables below help demonstrate the differences between each.
Workers' comp pros and cons
| Pros: | Cons: |
|---|---|
Covers medical bills and lost wages
|
Generally limited to work-related issues
|
|
Includes vocational rehab
|
Covered individuals waive the right to sue their employer
|
|
Rapid claims processing
|
|
|
Uses the no-fault system
|
Disability insurance pros and cons
| Pros: | Cons: |
|---|---|
|
Offers broader coverage that can apply to non-work-related issues
|
Does not cover medical expenses directly
|
|
Offers longer benefit periods
|
Slower, more complex claims approval process
|
An Independent Insurance Agent Can Help You Find the Right Workers' Comp and Disability Insurance
When it's time to find the right workers' comp and disability insurance for your business, no one's better equipped to help than an independent insurance agent. These agents have access to multiple workers' comp insurance companies, so they're free to shop and compare policies and rates for you.
They'll get you matched to the policies that offer the best blend of coverage and cost. And down the road, your agent will still be there to help update your coverage as your business's needs evolve, and can even file workers' comp claims or disability insurance claims for you.
Sources
https://mosey.com/blog/states-with-disability-insurance/
https://www.northwesternmutual.com/life-and-money/whats-the-difference-between-workers-comp-and-disability-insurance/
https://www.insureon.com/blog/workers-comp-vs-disability-insurance