How Employee Compensation Works

Disability and Life Insurance

Long and Short-Term Disability

In the United States, short-term disability (STD) is not provided by many employers, however, some states do require it for up to 26 weeks. It is designed to replace an employee's income on a short-term basis as a result of a disability, and is usually equal to about 60% of the employee's gross weekly pay. This way, the amount the employees draw is closer to the amount of lost income that the employee actually took home (net) prior to the disability.

Long-term disability (LTD) is not required by law, but some companies do offer it as a standard benefit. Long-term disability is lost-income coverage that kicks in as a result of a disability. It is also based on about 60% of the employee's gross income. There is usually an elimination period of 30 to 180 days before the benefits will begin, so it typically picks up where short-term disability ends (if STD is offered). LTD benefits can continue on for life, although most terminate at age 65 when social security kicks in. Many employers pay all of the long-term disability premiums.

Some companies pay for short-term disability and make the long-term optional, sometimes at a reduced cost to the employee. The logic behind this is that you want the employee to come back to work after a short, unforeseen accident or injury -- employers rarely see an employee come back from a long-term disability. Also, there are many variables in selecting the policies, everything from the exclusion period, which can be based on different time periods if it's an injury or illness, to pre-existing condition limitations, self-reported claim limitations, own-occupation protection, and rate guarantee. And, if the company pays for the benefit, it is considered taxable income; if the employee pays for the benefit, it is considered insurance and is non-taxable.

Think about your workplace and consider the types of accidents that could possibly occur to help decide what types and levels of disability insurance you should cover. Also, remember to go through a reputable broker to get the best deal.

Life Insurance

Depending on the size of your company, you can offer group life insurance to your employees for as little as 5 cents per $1,000 worth of coverage. Not a bad deal! Your employees and prospective employees will appreciate it because it means they won't have to get physicals before they're covered, and usually they can convert the plan to an individual life insurance plan if/when they leave the company.

The most common coverage for employees is a policy equal to their salary. In most cases, the employer pays the entire premium. Some companies also allow the employee to purchase additional coverage for family members or themselves at a low monthly cost. The insurance rates will be evaluated every five years to account for rising (or falling) average ages of employees, so rates may fluctuate depending on the demographics of the business.

If your business has fewer than 10 employees, you probably won't be able to purchase group life insurance.

Next, let's go over paid leave. Not only do you have to pay your employees when they work, but you sometimes have to pay them when they don't...