The basic cost factors for all Disability products are; 1) when will the benefits begin, 2) how long will the benefits last, and 3) how much benefits are being paid. The longer before benefits begin, the less expensive; the longer benefits are payable, the more expensive.
Short Term Disability –
Short term disability (STD) insurance covers accidents and sickness that result in a short term or temporary disability. It is normally purchased as a group product but can be offered through payroll deduction (Aflac, etc.).
For group short term disability insurance, there are two categories for when benefits begin; accident and sickness. Normally the waiting period is the same for both but it can be different (i.e. 1st day accident, 8th day sickness). Again, the longer before benefits start, the cheaper the coverage will be. Most often the STD corresponds with the sick pay policy of the employer. Most typically we see 7 or 14 day waiting periods.
How long benefits are payable is another factor of cost. If an employer has a long term disability (LTD) plan, the STD dovetails or coincides with the waiting period for the LTD. Benefits can last up to 2 years down to 2 weeks. When put together with LTD, we typically see either 90 or 180 days of benefits for the STD and then LTD picking up after that. If there is no LTD benefit, the STD usually stretches to 6 months to 1 year and in some cases, 2 years.
In group STD, the amount you can get as a benefit is always limited to 60% of your salary with a weekly cap. The weekly cap is usually $500. The larger the group, the higher the cap will be. The benefits are taxable income to the employee and the premium is deductible to the employer.
Long Term Disability –
In most group scenarios, LTD kicks in when STD benefits end. If there are no STD benefits, the typical waiting period is 90 or 180 days. You can get 365 day and 730 day waiting periods on policies also.
Long term disability lasts for greater than 2 years. It can be 5 years, to age 65, to age 67 or lifetime. Again, the longer the benefits last, the more expensive it is. Group coverage is limited to 60% of your salary with a monthly cap. The cap is specific to the type and size of group. In most cases the cap is $5,000/month.
The benefits paid through group LTD are taxable to the employee and the premium is deductible to the employer. This often creates a problem because the employee is taxed on the benefits which are 60% of their previous pay, which, after taxes, works to about 40% coverage.
This is remedied by buying individual coverage to supplement the group coverage. This coverage can be employee paid or employer paid and charged to the employee as income. This way the benefits are received tax free, making up the difference.
The downside to individual coverage is that it is becoming increasingly difficult to qualify for and takes a long time to get issued. The upside is that the definitions and terms of an individual contract are usually superior to a group contract.
Business Overhead Coverage –
Business overhead coverage (BOE) is a tax deductible expense to the employer. It provides coverage on the owner to pay the expenses to keep the doors open while the owner is disabled. It pays for rent, salaries, utilities, subscriptions; basically all the overhead of running a business. This coverage gives the owner the opportunity to have a business to come back to or give them enough time to sell or wind down the business.
BOE is only written on an individual basis and is subject to the owner being able to qualify. Most contracts are written as a reimbursement contract meaning the insurance company reimburses the company after a bill had been paid. The insurance company does not just give the business cash to use any way it wants.