Workers Compensation and Disability Insurance: What's the Main Difference?
Workers' compensation (WC) and disability insurance are designed to provide financial protection to individuals who cannot work due to illness or injury. While they are somewhat similar in terms of the benefits they provide, the difference is contextual and situational with respect to the job location, accident type and compensation.
Depending on your state’s law, employers may be required to buy workers’ compensation insurance for on-the-job employee injuries. Usually, the requirement is based on the number of employees or specific industries. For example, California laws require workers’ compensation insurance for small businesses with a single employee on payroll while other states may not make workers’ compensation mandatory until there are three or four employees. In Texas, workers' compensation may not be required, however, employers without workers' compensation policies are required by the state to qualify financially to self-insure, and the employer will self-pay all employee claims. The ability to self-insure will be for those entities with WC annual premium of at least $500,000.
Disability insurance is purchased by an individual to cover off and on–the job illnesses and accidents. These insurance policies replace a portion of income when an illness or injury takes away the insured’s ability to work and allows them to meet their ongoing financial obligations.
For the employer, the benefit from workers’ compensation comes down to avoiding out of pocket payments for injured employee’s medical care and lost wages while also complying with the law.
However, there are some key differences between workers comp vs disability insurance:
Workers' compensation specifically covers work-related injury or occupational disease suffered by an employee of an organization. It is a form of disability insurance that provides finanical benefits to employees injured or suffering an occupational disease directly related to their employment. It replaces a percentage of income and pays for all medically necessary care.
Disability insurance covers a broader range of medical conditions or injuries that prevent an individual from working, regardless of whether it is work-related or not. In simple words, workers’ comp insurance is primarily an employer-purchased policy meant to pay employee medical care costs, loss wages and the Employers Liablity coverage typically included in WC policies, handles potential third-party litigation costs. Disability insurance is an employee-purchased policy that replaces lost wages for him/her for incidents regardless if they are work related or not. Note, if both policies are covering the same incident, the carriers will coordinate the income replacement benefits.
Workers' compensation generally covers medical expenses, replacement services, rehabilitation costs, and a portion of lost wages for injured employees or those suffering from an occupational disease. Payment of claims is provided by an employer's workers' compensation insurance company.
Disability insurance covers a percentage of an individual's income if they become disabled and cannot work. Individuals can purchase it privately or through an employer-sponsored group disability plan. Private disability insurance is not to be confused with benefits available through government programs like Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) administered by the Social Security Administration. Disability insurance pays a percentage of salary loss when disabled by a covered condition. The coverage period can be short-term or long-term depending on the type of policy purchased by a person.
Workers' compensation benefits are available to employees who suffer job-related injuries or occupational diseases Employees are generally entitled to benefits regardless of who was at fault, employer, co-worker or employee. Some states can reduce or deny benefits if an injured worker was under the influence of alcohol, illicit drugs or non-prescribed medications.
Disability insurance benefits, are payable to individuals who are unable to work due to a disability or debilitating illness, whether it is work-related or not. Eligibility requirements may vary depending on the insurance policy and the specific terms and conditions.
4. Source of Benefits
WC policy benefits are paid by the employer's workers' compensation insurance company. Employers, depending on the state and its requirements, must carry this insurance, and the employer pays the premiums. Each state has a governing body overseeing Workers’ Compensation administration to assure the appropriate payment of benefits on workers’ compensation claims.
Disability insurance, whether obtained privately or through an employer-sponsored plan, claims are paid by the private insurance company that issued the policy.
Workers' compensation benefits are tied to the specific job and employer. If an employee changes jobs, then just the ability to work would close their prior workers compensation claim, but outstanding medical expenses would be paid. If an employee was dismissed while out on workers compensation, the benefits continue regardless of their employment status after the injury. In fact, there are some laws in place that prohibit the dismissal of employees because they were injured on the job.
Disability insurance, however, if purchased individually is portable and not tied to a specific job or employer. Employer sponsored disability coverage may or may not be portable, it will depend on the situation and policy language. Individual policies can provide coverage regardless of the individual's place of employment. In a way, it can also be called income protection insurance.
It is important to note that the specific details and requirements of workers' compensation vary from one state to another and disability insurance varies by insurance carrier and policy terms. It is advisable to consult with your local laws or an insurance professional to obtain accurate and up-to-date information relevant to your situation. At InsuranceAdvisor.com, we provide resources, information and guidance to help businesses make smart choices on coverage.
FAQs for Workers' Compensation and Disability Insurance
1. What is workers' compensation?
It is an insurance policy purchased by employers. It provides medical and financial relief for those employees who have suffered work-related injuries or occupational diseases. It covers medical expenses, lost wages, and rehabilitation costs for injured workers.
2. What is disability insurance?
It is a kind of insurance purchased by an individual. It provides income replacement in the event of a disabling injury or illness. It covers a portion of an individual's lost income (around 2/3 amount) when they are unable to work due to a covered condition.
3. What is the main difference between disability insurance and workers compensation?
Workers' compensation specifically covers injuries or diseases that occur in the workplace or are work-related, whereas disability insurance covers injuries or illnesses that happen outside of work.
4. Are workers' compensation and disability insurance mutually exclusive?
Workers' compensation and disability insurance are not mutually exclusive. In some cases, an individual may be eligible to receive benefits from both sources. For example, if an employee sustains a work-related injury that leaves them partially disabled, they may receive workers' compensation benefits for their medical expenses and lost wages, while disability insurance can provide additional income replacement, but never will a person collect more than what they had been earning pre-disability.
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