Responsibility for short term disability insurance cost may fall on one of three possible persons. In many corporations, government agencies and other large organizations, the employer is responsible for the expenses associated with this insurance plan that is an intermediate source of compensation between sick leave and long-term disability. Some institutions and organizations require the employee to contribute all or a portion of the premium costs. There are also rare short-term disability plans available to individuals that do not work for a large company.
When an employer pays for this type of plan, they may do so in one of two ways. Many employers contract an insurance company to handle and fund the plan. The employer pays the monthly premiums for their employees. However, since this may involve a large number of staff, the employer will usually get an excellent rate on those premiums, much lower than an individual seeking solo coverage would get. One example from a company in the short-term disability insurance business shows that a group rate for an employer would average around $192 per month per individual.
Sometimes employers handle their own fund and do not involve an insurance company. This way they can control costs and determine eligibility and qualifications. Obviously, there is little or no cost to handling this fund and the employer’s costs will be limited to what it pays out as compensation when a plan is activated.
When employees pay for this insurance, they typically do so on a pre-tax basis. Since the benefit is usually determined as a percentage of salary, the premium is also dependent on salary. When salaries are budgeted on a yearly basis, the issuer of the policy multiplies those salaries by a set percentage which determines the monthly premium after the resulting number has been multiplied by 13, 18 or 26 weeks, whichever number represents the maximum time period of payments under a short-term disability plan.
As an example, consider a plan sold directly to an employee through his employer. A 45 year-old professional making $60,000 a year might pay $2,000 each year for a short-term disability policy. This policy might pay him as much as $3,000 a month for the duration of the policy. Exact amounts and times would depend on the details of the plan issued through the company for which he works. One advantage for him is that the $2,000 which he spends on coverage is not considered income and he will not be taxed for it.
In some of the states that mandate this sort of coverage for all eligible employees in the public and private sector, it is the state which pays for the benefits. These states fund the insurance program with payroll taxes. In such a case, the benefits come at little cost to the employer, while the costs to the employee may depend on the size of their salary.
Cost To Employers
When employers offer this kind of coverage and they pay for it without the aid of an insurance company, they avoid costs on premiums but will have to cover the stated percentage of an employee’s salary for the agreed-upon duration of benefits. If employers use an insurance company, they can avoid potentially large pay-outs to inactive employees since the insurance company handles payments once the proper paperwork has been filed. In those cases in which the employer merely acts as a conduit through which the employee may pay an insurance company for coverage, the employer simply pays for the paperwork process and is not involved financially in the plan.
Cost To Employees
Employees who pay for their short-term disability insurance through their employer have to pay the premiums as explained above. There is not a set number anywhere to determine how much an employee might pay for these benefits. The average around the country seems to be somewhere between one and three percent of the annual salary.
Employees should consider certain crucial factors when deciding whether or not to purchase such insurance. If a person works in a physically demanding job, then this insurance is worth the cost. More sedentary jobs are a different matter. The chances of suffering an injury which makes the job impossible to do are much lower, because the main part of the tasks involved may be mental. However, short-term disability may still be desirable.
Employees should remember that the compensation they receive will now qualify as income. The premium payments, if they came out of the employees’ paychecks, were not taxed since the money was never available to use as income. However, once such a policy begins paying out, the payments are in place of a salary and are taxed accordingly.
How Much Does Short Term Disability Cost Insurance Companies?
To give an idea of how much money is involved and how frequently such claims are made, consider these numbers from one major disability insurance company. They received more than 400,000 claims in just one year recently. During the course of that year, they paid $4 billion to individuals claiming on those policies or to their families. Of all those disability claims, this company approved over 90% of them.
How Common Is This Coverage?
The market for short-term disability insurance includes some 15 million employees in the United States. They are employed by more than 210,000 companies. This comprises almost 40% of the eligible workforce, since eligibility is often restricted to people who have worked for a company for a certain period of time and hold a particular status within the company. For instance, in some cases only salaried professionals working for a company may be covered after they have worked full-time for a year.
The short term disability insurance cost, like the cost of other insurance, goes up every year. For this reason, these plans are best purchased in group settings. This helps keep costs down for employers, for employees and for the states which pay for the plans.