Many workers are unclear on the difference between disability insurance coverage and workers compensation insurance. Often, workers will decline optional disability insurance coverage, however badly needed – because they think they are covered under their employer’s workers compensation plan. This is usually a mistake.
Workers Compensation is designed to protect both businesses and workers from the devastating potential consequences of work-related injuries and fatalities. Under workers’ compensation plans, covered workers are guaranteed access to a substantial pool of money that can cover lost income, pay medical expenses (generally with no deductibles or out of pocket costs) and provide for job retraining and physical and occupational therapy services that would be beyond the ability of many employers to pay out of their own pockets. In return, workers give up the right to sue their employers for damages arising from covered incidents. This also helps protect workers, because if they had to resort to lawsuits, the courts could take months or years to resolve claims – and meanwhile the worker may have nothing to live on.
Most state laws require employers to carry workers compensation insurance.
Disability insurance, on the other hand, is designed to protect the insured from loss of income arising from a disability from any covered cause, except for exclusions for disabilities arising from criminal activity or acts of war that would normally be covered by VA or military medical insurance (Tricare).
In the event of a qualifying disability, the disability policy will provide a percentage of pre-disability income, which is normally between 50 and 70 percent. (This benefit is taxable if the employer pays the premiums, and tax-free if the premiums are paid by the insured with after-tax dollars).
Why Workers Need Private Disability Coverage
According to the Council for Disability Awareness, only about 1 disability in 20 is the result of a workplace injury or work-related illness. Fully 95 percent of all disabled individuals would not be covered under workers compensation rules. They became disabled because of chronic illnesses and accidents not related to the workplace.
Common causes of disability include musculo-skeletal and nervous system diseases like muscular dystrophy, multiple sclerosis, rheumatoid arthritis, as well as things like biking and ski accidents, complications from pregnancy, schizophrenia and other mental illnesses – none of which would ordinarily be covered under workers compensation insurance.
In the absence of disability insurance coverage, the average worker has little or no protection in place to safeguard the worker or his or her family from the devastating effects of a disability that robs the worker of his or her ability to earn a living.
Furthermore, even where workers compensation insurance is in place, benefits may not be sufficient to cover wages for higher earners. Some states have cut back on wage replacement benefits available under workers compensation in order to reduce costs. Employers pay substantial sums in workers compensation premiums. Where benefits are high, premiums must also be high, and this can make it difficult for states to attract business. This creates economic and political pressure to reduce benefits and premiums. According to ProPublica, 33 states have moved to reduce workers compensation benefits to workers since 2003. This is another reason workers need private disability insurance, whether owned individually or as part of a group employee benefit plan.