Fringe benefits: Don’t overlook disability coverage

In many ways, the days of employers offering only “traditional” employee benefits are history. Now, novel perks such as on-site gyms, free snacks and pet insurance are all the rage. But it’s often the more traditional benefits that provide the most value to employees in the long run. Case in point: disability coverage.

A common worry

Disability insurance is neither sexy nor widely offered. Yet the 2016 Insurance Barometer Study by LIMRA, an association of financial services firms and insurers, found that 56% of American workers worry about supporting themselves if disabled and unable to work — and the percentages are higher among younger workers, hitting 70% for Millennials and 68% for Gen Xers.

These fears aren’t misplaced. The Council for Disability Awareness reports that just over 25% of today’s 20-year-olds can expect to miss work for at least a year because of a disability before they reach full retirement age for Social Security purposes. And the average duration of a disability claim is almost three years.

Costs and taxes

Short-term disability insurance typically covers three to six months of pay, with long-term generally covering the remaining length of the disability or until retirement. According to the Bureau of Labor Statistics (BLS), the median salary replacement rate for both short- and long-term policies is 60%. Most long-term plans come with a maximum amount payable.

You can help employees protect against disability losses for a relatively low cost — especially compared to the expense of health insurance. The BLS estimates the cost of providing short- and long-term disability insurance to be about 1% of total compensation, or $624 per year for a full-time, private-sector worker.

The BLS says that most workers don’t make contributions to their short- or long-term disability insurance plans. Those employees who do and use after-tax dollars to pay for the coverage will see an upside if they ever need to tap the benefits: They generally won’t be taxed on the payouts, which essentially amounts to higher benefits.

Education needed

To help your employees get the most out of disability insurance, you’ll need to educate them. In a 2017 survey, LIMRA found that fewer than two in three workers understand what disability insurance is, and only 43% know that short-term disability insurance is often used to provide paid leave after routine childbirth. You might find it effective to provide examples of various ways employees can benefit from having disability insurance. Interested? We can provide you with further information.