Advisor reviewing disability insurance and employee benefits with small business owner.

Every disability insurance contract is unique—what’s in yours?

The benefits you offer employees can help make or break their employment experience. In fact, they can even help you hire the best of the best.

And disability insurance is a vital component of the benefit mix. After all, it helps employees protect one of their most valuable assets—their income. But disability insurance contracts aren’t all created equally.

What’s in your disability contract?

There are a variety of ways disability insurance can be defined and structured. That’s good; it gives you the opportunity to customize coverage to meet your employees’ needs. It also means it’s a good idea to find out exactly what’s in your disability contract, so you can make sure all its features work for your employees—and for your bottom line.

Consider some of the key questions you might ask about your disability coverage, and how the answers can help differentiate one contract from another.

What qualifies as a disability?

For both short-term disability and long-term disability, the way a carrier defines “disability” can determine if an employee qualifies as disabled. Many disability contracts have a standard definition that requires the employee to be unable to perform the majority of their duties, as well as experience an income loss.

On the flip side, an “Or” definition of disability provides income protection benefits with a focus on the employee returning to work. Employees qualify for disability benefits by meeting either 1 of a set of 2 criteria. For example:

The employee is unable to perform the majority of the substantial duties of their own job or own occupation


The employee is unable to earn 80% of their pre-disability income while working in a modified capacity

Why is this important?

Using an “Or” definition offers your employees flexibility, making it possible for them to receive disability benefits while continuing to work part-time if they’re able. This means that employees who are not totally disabled may still qualify from day one.

How does the actual occupation or job affect the disability decision?

When it comes to determining the measurement of what qualifies as a disability, some disability insurance contracts have “own occupation” language for both short- and long-term disability. An employee’s own occupation is the occupation the employee was performing when the disability began. An employee is considered disabled if they’re unable to perform within that occupation.

Some short-term disability contracts offer “own job” language for short-term disability. When determining if an employee’s disability qualifies for benefits, those carriers look at the job the employee was performing on the date of the disability—not the broader occupation.

Let’s look at an example. A customer service manager who travels across the state for her job becomes unable to travel due to an injury. Under the own job definition, this person would qualify for short-term disability because she can no longer travel. But under an own occupation definition, she wouldn’t qualify for short-term disability benefits because travel is generally not a requirement within the normal duties of a customer service manager.

Why is this important?

Short-term disability is typically purchased as a replacement for or supplement to sick leave—or as a salary continuance benefit—with the expectation that the employee will return to his or her original job. That’s why the own job definition is a significant distinction.

What about employees who earn commissions or bill for services?

Some long-term disability contracts include what’s often referred to as “extended earnings protection.” When returning to work following a disability, employees who earn commissions and bill for services may need extra time to return to the financial level they were before the disability. This feature can supplement an employee’s income when they’re back to work for several months while the employee’s income is below certain pre-disability levels.

Why is this important?

Professionals in certain occupations—including attorneys and physicians—may need to cancel appointments, lose clients or patients, or otherwise experience a decline in income that can’t be earned immediately when they return to work. Extended earnings protection can help ease that financial impact.

20% vs. 80%

Many disability contracts require “20% income loss” to start paying disability benefits. Some require an employee be “unable to earn 80%” of their pre-disability income.

What’s the difference?

It can be considerable. Disabled employees whose income is based partially or totally on commissions, services or billable hours may not experience an immediate income loss.

The “20% income loss” language doesn’t recognize the immediate impact of a disability because payments from these sources can continue to be received after the disability begins.

The “unable to earn 80%” feature acknowledges the impact of the disability immediately and allows the employee to qualify for benefits sooner.

Is there an affordable disability insurance alternative for employees?

You can set up your disability insurance contract to pay benefits as a percentage of income or in set amounts—incremental benefits—which can be an affordable option for employees. If you offer incremental benefits, your employees would purchase disability coverage in specific increment amounts they can afford. Employees can’t choose an amount that’s more than 60% of their pre-disability income. For example, the increments might be set up like this:

  • Short-term disability amounts range from $100-$1,500 per week in increments of $50
  • Long-term disability amounts range from $500-$6,000 per month in increments of $100 or $250

Why is this important?

Incremental benefits give employees the power to purchase the amount of coverage they need and can afford. After all, no two employees’ needs are exactly the same. They might choose enough to cover a big-ticket item like their mortgage or select more coverage to also include everyday expenses like groceries, car payments and phone plans.

Building a tailored disability insurance solution

No two businesses are the same. That’s why your disability coverage should be tailored to fit your specific needs, and those of your employees. It’s important to stay on top of your contract provisions—and work with your broker to fine-tune what you offer to better meet your needs and help boost your employees’ job satisfaction.

Learn more about group benefits insurance from Principal.

  • Benchmark your employee benefits. See how your company’s benefit design measures up. Get started.
  • Talk to your broker about how disability insurance from Principal can be a part of your benefits package.

This is a summary of the benefits of disability insurance, but there are limitations and exclusions. For cost and coverage details, contact your Principal® representative.

Disability insurance from Principal® issued by Principal Life Insurance Company, Des Moines, IA 50392.