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Voluntary disability insurance: What is it & is it worth it?

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Employers are in a tight spot nowadays when it comes to attracting and retaining talented employees. The competition is fierce among employers trying to fill lengthy lists of job openings from a pool of potential workers that seemingly have the upper hand when negotiating salary and other details, like working remotely.

One of the ways some companies are setting themselves apart from the competition is by offering voluntary benefits to their workforce. While most employees expect their employers to provide the standard benefits like employer-sponsored health insurance and a 401(k) retirement plan, they also respond positively to voluntary benefits.

In this article, we'll cover everything you need to know about voluntary disability insurance, specifically:

Read on to learn more.

Voluntary benefits, explained

Voluntary benefits at work — also known as voluntary group insurance, voluntary worksite benefits, or employee-paid benefits, — are benefits provided to employees at little or no cost to the employer. Instead, they are paid either fully or partially by an employee through payroll deduction.

Types of voluntary benefits

While some voluntary benefits offered by employers could be considered “non-traditional,” such as nutrition counseling, cyber-theft protection, and credit repair, most voluntary benefits are insurance-oriented. They’re designed to complement a company’s healthcare offerings and provide financial security to employees who become sick or injured.

These are some common voluntary insurance benefits employers offer:

Accident insurance

Accident insurance helps cover out-of-pocket expenses that aren’t covered by health insurance that an employee may face if they, or a family member, are injured in an accident.

Cancer insurance

Cancer insurance is similar to accident insurance, cancer insurance will help pay expenses not covered by health insurance, such as experimental treatments, travel and lodging related to cancer treatment, etc.

Critical illness insurance

Critical illness insurance provides benefits to an employee who experiences a serious medical problem, including heart attack, stroke, cancer, coma, paralysis, etc.

Hospital indemnity insurance

Hospital indemnity insurance helps cover the costs associated with a hospital stay. It’s especially beneficial for employees with high deductibles and copays, who may need help with childcare if hospitalized or need to travel to receive medical care.

The value of voluntary benefits today

All of these voluntary benefit plans pay cash benefits directly to the employee, not the provider of the medical services received. The dollar amount paid to the employee is specified in each of these policies and is not affected by any group health insurance the employee may have.

While some large employers offer group health, life, and disability insurance as standard employee benefits and pay a portion of the employee’s premiums, many companies are limited by finances as to their ability to offer these traditional benefits.

What is voluntary disability insurance?

Voluntary disability insurance provides financial protection for an employee who suffers an illness or injury and can’t work and earn a paycheck. This presents no cost to the employer because the premiums are paid by the employee.

There are two types of voluntary disability insurance: short-term and long-term. Let’s look at how each type of coverage works.

Short-term voluntary disability insurance

Short-term voluntary disability insurance protects an employee from financial hardship while recovering from an accident or illness by providing temporary income for routine expenses.

Once a claim is filed, there is a waiting period, also known as an elimination period, lasting from one to 14 days before an employee can begin receiving benefits. The claim will include documentation from a physician that provides details concerning the injury or illness, including the date it first occurred or appeared. This date is typically used as the beginning of the waiting period.

Most short-term voluntary disability insurance policies pay benefits for three to six months, depending on the insurer. However, some policies, especially if connected to a long-term disability insurance policy, may have benefits lasting up to a year.

The benefit amount paid to the employee is typically 40% to 70% of the employee’s earnings. Because the employee paid the premiums for this voluntary plan, the benefit payments will not be taxable.

Learn More: Short-Term Disability Insurance

Long-term voluntary disability insurance

Long-term voluntary disability insurance also begins paying benefits after a specified waiting period, and any coordinated short-term disability benefits have been exhausted. Typical waiting periods for long-term disability insurance policies are 30, 60, 90, and 365 days.

Most long-term voluntary disability insurance plans provide coverage for 36 months, although some will pay the employee a benefit for five or ten years, to age 65, or the rest of an insured’s life. Benefit payments for long-term disability insurance range between 60% and 70% of an employee’s income.

Benefits for long-term insurance coverage will usually terminate when the employee is medically cleared to return to work, or the policy benefits have been exhausted. Because the employee paid the policy premiums, benefits are not taxable.

Learn More: Long-Term Disability Insurance

Is voluntary disability insurance worth it?

Enrolling in your company’s voluntary disability insurance plan is a smart financial move if you aren’t currently covered by another disability insurance plan. But, before enrolling in your employer’s plan, consider purchasing a private individual disability insurance plan instead.

The primary reason an individual disability insurance policy is preferable to voluntary disability insurance comes down to one word: portability.

In most cases, when you’re covered by an employer-sponsored disability insurance plan and leave your employer, your coverage is not portable, meaning that you can’t bring your coverage with you when you leave the organization. This can leave you in a dangerous position financially if you’ve developed a non-disabling illness during your employment, like diabetes, high blood pressure, or another type of pre-existing condition.

For example, if you were diagnosed with Type 1 diabetes while you were covered under your voluntary disability policy and may have never even filed a claim because your diagnosis didn’t prevent you from working, you may now find it difficult to qualify for an individual disability policy when you leave your employer, or be eligible for standard rates.

Conversely, once you own an individual disability insurance policy, the insurance company can’t cancel your policy or raise your rates regardless of what medical conditions you develop. As long as you pay your premiums, your income will always be protected with an individual policy.

Apply online for individual disability insurance in minutes.

Don’t buy voluntary disability insurance on price alone

When comparing voluntary disability insurance with individual disability insurance, you’ll notice that your cost will be lower for the voluntary policy. This is because insurers offer a discount because you’re part of a group.

While this may be attractive, consider making a long-term decision and purchase an individual disability insurance policy. It’s likely that your current employer won’t be your last, and that you’ll end up leaving your voluntary disability insurance plan behind on your last day of work there.

The odds that you’ll use your disability insurance increase as you get older. Having a policy that will cover you as you age regardless of where you work is the right long-term financial decision, even if it does cost a bit more.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published March 16, 2022
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