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Workers compensation vs. disability insurance: Key differences to know

Workers' compensation covers work-related accidents that occur on the job. Disability insurance covers that, too — plus, non-work-related injuries and illnesses.

Workers' compensation and disability insurance are commonly confused, even used interchangeably. And while they do have similarities, it's important that employers and employees alike understand the fundamental difference:

Disability insurance covers injuries and illnesses that occur both on and off the job, whereas workers' compensation only covers work-related accidents.

Seems simple enough, right? Well, as with all things insurance, it's not exactly that straightforward. Here, we break-down the important differences between workers' comp and the various types of disability insurance (including the pros and cons of each).

Workers' compensation, explained

Workers' compensation, a type of accident insurance for businesses, offers benefits to employees who suffer work-related injuries or illnesses. This insurance helps cover more than just your medical care. It also covers wages from lost work time and more.

Workers’ compensation insurance benefits vary by state. Your best bet to understanding how workers' compensation will affect you: Learn more about filing a workers' compensation claim in your state by learning about filing requirements, deadlines, benefits, and appeals.

Your employer cannot fire you for applying for workers' compensation. You may file a lawsuit if you believe your employer fired you because you applied for workers' compensation. Your employer may fire you for other reasons, however, particularly if you qualify as an at-will employee.

Disability insurance, explained

Disability income insurance, also known as disability insurance or income insurance, supplements your income if an injury or illness limits or prevents your ability to work. It functions by replacing part of your monthly earnings when you become disabled. You may have heard of three key types of disability insurance: short-term disability, long-term disability, and Social Security Disability Insurance (SSDI). Let's go through a quick rundown of each:

  • Short-term disability insurance: Short-term disability insurance (STDI) pays up to 60 percent of your gross monthly income. However, this type of insurance doesn't last long — just three to six months. You probably have an STDI plan through your employer.
  • Long-term disability insurance: Long-term disability insurance (LTD), as you might imagine, lasts longer — up to two years until you retire. It pays you about 60 to 80 percent of your gross monthly income.
  • Social Security disability insurance: Social Security Disability Insurance (SSDI) comes from the federal government. This type of disability insurance covers individuals with a severe disability. You may encounter challenges trying to qualify for this type of disability insurance.
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Key differences between workers' compensation and disability insurance

As you already know, workers' compensation only covers you when you experience work-related injuries and your employer pays for workers' compensation through an insurance company. Disability insurance covers that, too — plus, non-work-related injuries and illnesses.

If you collect workers' compensation, you usually will not have suffered a long-term disability. Instead, you more likely will have a temporary injury caused by something that happened on the job.

Another key difference: You pay the insurance premium for disability insurance, while by law, your employer will pay the premium for workers' compensation. In addition, disability benefits typically do not cover workplace injuries, often pay less in wage loss benefits than workers' compensation. Disability insurance also does not cover medical bills.

Let's go through a quick list of pros and cons so you know what you can expect from both workers' compensation and disability insurance.

Pros and cons of workers' compensation

Understand your options and rights with workers' compensation so you know what to expect if you need to use it.

Pros

  • Previous injuries or existing conditions count. (They do in certain situations, anyway.) If a work-related injury has worsened a previous injury or existing condition, for example, you could get workers' compensation benefits. However, if you have a preexisting condition, your employer's insurance carrier may deny your claim.
  • Benefits may cover more than you think. You may not realize that benefits go way beyond medical expenses. For example, benefits can help cover lost wages, ongoing care costs, and even funeral expenses. If you die on the job, your workers' compensation will also cover your weekly take-home pay for a specific period of time to take care of your loved ones.
  • You can report right away. You need to report a job injury right away, and you can even report a slow-growing injury as soon as you realize it was caused by your job. Reporting right away helps prevent problems and delays in receiving benefits and medical care.

Cons

  • You give up the right to sue your employer. Workers' compensation was created to protect employers from getting sued. You may feel as if you may not end up getting treated fairly when you accept workers' compensation insurance benefits.
  • You have a statute of limitations in most cases. Again, you don't want to wait too long to file. For example, the statute of limitations for filing a workers' compensation claim in California occurs one year from the date of your job-related injury or illness. However, if your health situation gets worse, you may reopen an old claim.

Pros and cons of disability insurance

Know as much as you can about the differences between short-term and long-term disability insurance. You may also need to know the ins and outs of SSDI to know what you qualify for and what best fits your needs.

Pros

  • Disability insurance can stay in effect as long as you're disabled. Depending on the type of disability insurance you have, you could stay on it as long as your disability requires. For those who suffer from severe and permanent disabilities, you won't see a deadline date for your SSDI payments to end. As long as you remain disabled, you will continue to receive your disability payments until you reach retirement age.
  • Protects your retirement benefits. The Social Security Administration doesn't factor SSDI into the years with $0 earnings into your retirement benefit, so you could earn more in retirement.

Cons

  • Can be short-lived. Short-term disability insurance only offers benefits for a relatively limited amount of time, about three to six months.
  • An elimination period exists. An elimination period, or waiting period, for short-term disability typically lasts one or two weeks. The most common elimination period for long-term disability sits at 90 days. You may pay more for waiting periods. Less-expensive policies typically have longer waiting periods.
  • You must pay monthly premiums. The obvious disadvantage of disability insurance is that you'll need to pay monthly premiums. However, the benefits far outweigh the premium you pay per month.

At Breeze, you can apply for a personalized disability insurance policy in just a few minutes with a completely online process.

Apply for disability insurance online.

Assessing your needs

Now that we've gone through the differences between workers' compensation and disability insurance, it may seem like the similarities end when you get money to replace your income.

Regardless of the fact that you get workers' compensation automatically through your employer, you may need to add disability insurance to the mix.

You may find a few other reasons to get disability insurance beyond the regular reasons. For example:

  • You're the breadwinner of your household
  • You still have a mortgage or other debt that you need to pay off
  • You're self-employed or your employer doesn't provide it

All of these are sensible reasons to purchase disability insurance and protect your ability to earn an income.


Melissa Brock is the founder of College Money Tips and a full-time freelance writer and editor. She loves helping families navigate their finances and the college search process. Check out her FREE essential timeline and checklist for the college search!

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.

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