Workers’ Compensation vs Disability Insurance

One of the first and important things that employees look for in a company, before applying for a job posting, is the compensation it offers. We all know that Workers’ Compensation is a state-regulated insurance that each business owner must provide their employees, but it does not cover everything. One insurance does not fit all.

That’s why it is important to understand different insurance coverage out there in the market to weigh and match the need of your business and employees.

Take a look at these two types of insurance: Workers’ Compensation and Disability Insurance.

What is a Workers’ Compensation?

As mentioned, a Workers’ Compensation (also known as Workers’ Comp) is a financial assistance mandated by the government to protect both the employers and employees.

This indemnity protects the employer from:

  • paying legal expenses from being sued by employees for negligence or alleged negligence of providing safe workplace and compensations required by laws
  • paying from his own pocket the medical charges when an employee gets injured or suffers from a disease caused by his or her job
  • paying fines and being imprisoned

This indemnity covers the employee with:

  • financial assistance for the immediate medical attention due to a workplace injury up to the limits (this may include the medical tests, treatment, rehabilitation, initial and follow up checkups, medicines, or hospitalization)
  • replacement of lost wages when the employee cannot report to work due to a work-related accident or illness

What is a Disability Insurance?

There is another coverage called Disability Insurance. We’re not talking about the disability benefit from Social Security Administration here, but a private insurance. This insurance provided financial assistance for short-term and long-term disability of the employees. It can provide benefits from a matter of days, weeks, years or even lifetime depending on the coverage plan.

Different from Workers’ Compensation, this type of insurance is optional, not state administered. A lot of employees in the U.S. add a private Disability Insurance to their company-paid plan. Some also combine it with their government-funded social security disability insurance.

The length of financial aid from a Disability Insurance, whether short-term or long-term, is based on the employee’s conditions. It can provide lifetime compensation if the employee is seriously injured and unable to return to work. The good thing about this insurance is that it is not limited to work-related injuries only but even for injuries or illnesses that occur outside of the workplace.

Workers’ Compensation coverage pays two-thirds of the employee’s Average Weekly Wage when they become disabled temporarily or permanently. However, Disability Insurance pays less.

Another distinction of these two products is, the benefits of a Workers’ Compensation is tax exempt whereas private Disability Insurance is not. It is taxable depending on who pays the premiums or how the insurance is paid. If the employer pays for the premiums, the disability income is taxable to the employee. If the employee pays for the premiums, the taxability depends on whether he or she pays with pre-tax or after-tax deduction.

Understanding the compensation processes and features is key to getting the best protection for the employer, the business, and the employees.


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