What is Disability Insurance Law?

Disability insurance law in the United States is legislation enacted by a handful of states that require employers to provide income replacement insurance for their employees who are unable to work due to injury or illness sustained off the job. Only five states require employers to provide disability insurance for their employees; such programs are voluntary in the rest of the nation. Many employers in the other states voluntarily provide disability insurance coverage for their employees to help them replace income lost due to illness or injury off the job; those incurred in the workplace are covered by workers’ compensation laws, which exist in all states.

Of the states that have a disability insurance law, only Rhode Island requires that employers enroll in a state-operated program. California, Hawaii, New Jersey, and New York set forth standards and parameters, but permit employers to choose among enrolling in a state-run program, purchasing coverage in the insurance marketplace, or self-insuring. Puerto Rico, which is a US territory, also requires mandatory disability insurance and permits employers the same three options. In all cases, the government-run programs provide only minimal coverage, and none provide for long-term disability insurance, which is coverage for a disability lasting more than a year. The benefits provided by self-insurance or coverage purchased in the marketplace must be at least actuarially equivalent to those offered by the government-run plans.

Disability insurance law is by no means uniform, varying greatly from state to state. There are some basic elements, though, such as the identification of which employees must be covered and which may be excluded. Part-time employees — generally those who work fewer than 30 hours per week — are generally excluded from disability insurance law requirements, as are newly-hired employees. Full-time employees who meet minimal service requirements — usually in the range of 30 to 60 days — usually must be covered.

The financial benefit itself is another basic element of any disability insurance law. The programs operated by the different states generally offer minimal benefits, usually less than 50% of the employee’s regular wage. When employers choose to self-insure, or to purchase their coverage from an insurance company, they can opt to increase the coverage amounts.

Another feature of any disability insurance law is a waiting period — a set time at the outset of a period of disability during which no benefits are paid. This is often one or two weeks, and acts much like the deductible in a traditional indemnity insurance policy. Once the waiting period has ended, the employee is eligible to start receiving benefits under the plan. An issue with the waiting period is the employer’s sick-pay policy: most disability insurance plans require that an employee exhaust all sick pay eligibility before receiving disability benefits.

Disability insurance law also establishes limits on the duration of disability benefits. California is the only state in which an employee could receive 52 consecutive weeks of disability pay; most states limit payments to six months or so within any one-year period. Long-term disability benefits usually are not provided by employers, but those who are totally and permanently disabled may apply to the Social Security Administration for disability benefits.