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Disability Insurance

How Much Does Disability Insurance Cost Employers?

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Published On: March 12, 2021

For employers looking at insurance options, cost can be a major factor in your decision. For some required types of insurance, like disability, you might wonder how much these policies cost employers.

The cost of disability insurance for employers depends on the type of business, amount of employees, age, gender mix, percent of coverage, maximums, elimination periods,  coverage definitions and limits, and location

Disability insurance will provide your employees income security when needed.

In this post, we discuss what disability insurance covers, the cost of disability insurance for employers, and how to find the best plan for your company.

Why Do Employers Offer Disability Insurance to Employees?

Disability insurance is a type of employee benefit that pays income if employees cannot work due to a non-work-related accident or illness. The insurance is needed more than you might think: About a quarter of 20-year-olds will become disabled before they retire, according to the U.S. Social Security Administration.

Disability insurance covers a large portion of a worker’s income when they lose their ability to work due to an illness or injury not resulting from their job. It generally replaces 60% of a policyholder's annual income up until retirement age – typically 65 years old.

In many cases, you may be required to purchase certain types of disability insurance when you have employees. U.S. government regulations generally require companies with employees to have a minimum of workers’ compensation, disability and unemployment insurance. Some states can require additional insurance, depending on your business and how hazardous it is.

Your business is explicitly required to carry short-term disability insurance for employees if you operate in a state where this coverage is mandatory. States currently mandating commercial disability insurance include California, Hawaii, New Jersey, New York and Rhode Island.

Otherwise, insurance requirements vary by state, so visit your state’s official commerce website and speak with an insurance broker to find out exactly what your business needs.

Offering this benefit is crucial to many employees, because rates for group plans are almost always less expensive than rates for individual coverage. Since your company is buying for many people on a consistent basis, the premium typically is much lower than individuals can get on their own. This is typical of any group policy versus an individual policy. 

In short, almost every business needs group disability insurance to safeguard its employees in the event of serious injury or illness. The coverage also alleviates the company from determining when to pay and how long to pay a disabled employee and the liabilities therein. It transfers that to the insurance carrier.

What Does Disability Insurance Cover?

There are two types of disability insurance: short-term and long-term.

Short-term disability insurance covers a portion of an employee’s salary for a short period of time. The length of time varies from policy to policy, but typically covers three to six months after the incident that qualified them as disabled. Long-term disability insurance, meanwhile, is used when the policyholder is disabled to where they are unable to work for more than six months.

Importantly, disability Insurance does not cover work-related injuries. Workers’ compensation insurance is used instead for accidents occurring on the job or work-related illnesses.

Disabilities from sickness and illness triggering coverage generally include chronic conditions like cancer, heart disease and back problems, along with off-the job injuries and, sometimes, pregnancy. Pregnancy coverage is an important benefit if your business expects to offer paid maternity benefits, as short-term disability partially compensates leaves of absence due to childbirth.

If your business offers or plans to offer disability insurance, you should familiarize yourself with the Employee Retirement Income Security Act (ERISA). These federal regulations, along with state guidelines, dictate how disability claims are made and what standards your group insurance policy must meet.

The cost of premiums for this type of coverage will vary for every organization and every insurance carrier. Researching coverage terms and prices, along with speaking to the right insurance experts, will tell you what makes the most sense for your business and lead to the best coverage.

The Cost of Disability Insurance for Employers

The disability insurance policies you can choose and how much you pay for them vary depending on your business’s industry, among other factors. Costs for coverage are affected by the perceived risk of employees in your industry and the stability of the workforce.

According to the Bureau of Labor Statistics, short and long-term insurance plans generally cost $0.15 per employee, per hour worked on average. This works out to a premium cost between 1% and 3% of an employee’s total compensation. Monthly premiums – how much you and/or employees pay for the policy – range from about $25 to $600, but this varies depending on many factors.

To determine pricing and coverage limits for these policies, disability insurance providers group jobs into specific occupational classes taking into account the hazards of the job and typical risk profile. Much of this figure is based on the historical claim experience associated with certain professions. However, the size of your business generally will not change the cost of disability insurance for employers. All else equal, a small business owner is often subject to the same rate as a large enterprise. The rate is made up of many factors that include loads and discounts.

Of course, employers take many different approaches to benefits and the insurance policies dictating them. Some businesses cover disability insurance premiums in full, while others ask employees to contribute a small portion to participate.

Contributions that an employer makes or the employee make have tax consequences to the benefit. This is best reviewed by a professional insurance broker, agent or advisor. 

The cost of short-term disability premiums are similar to, but generally more expensive, than long-term premiums. Employers are not legally required to offer long-term disability coverage, but many mid-sized and large corporations offer it to workers as a benefit.

How Do I Find the Best Disability Insurance Plan for My Company?

There is no limit to how many employees your business can offer disability insurance, and much of the workforce sees it as an essential benefit. Having coverage will not alleviate the risks your employees face outside of work, but it will protect them financially when tragedy strikes.

Insurance brokers and benefits brokers can research coverage options, conditions, limits and costs across multiple insurance companies, and recommend policies that best fit your needs. They can eliminate your need to learn about the intricate details of disability insurance requirements, making it easier to choose the insurance that will provide your employees security and fit your budget.

To decide which insurance you need and find the best disability insurance plan for your company, consider using an insurance broker who knows what you need and can get you the best rates. Start your broker search at Mployer Advisor, a free broker marketplace that allows employers to compare brokers, consultants, and advisors in one place.

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Looking for more exclusive content? Check out what’s trending on the Mployer Advisor blog, and be sure to catch the latest episode of This Week in Benefits.

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Brian Freeman

Founder and CEO, Mployer Advisor

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