Differences Between Workers' Compensation and Disability Insurance

As a business owner, you understand that workplace injuries can disrupt operations. But how can you protect your business from the financial and legal risks of such incidents? Understanding the right insurance coverage is essential to protecting your business from unexpected financial burdens.

Many business owners assume that all workplace injuries and disabilities are covered under the same type of insurance, but that's not the case. Some injuries happen on the job, while others occur outside of work, and the type of insurance that applies depends on the situation.

According to the Social Security Administration, 1 in 4 workers will suffer a disability during their career, which could leave them unable to work for weeks, months, or even permanently. This makes it critical for businesses to have the right protections in place to cover work-related injuries and non-work-related disabilities.

This is where workers' compensation and disability insurance come into play. While both offer financial protection for employees who are unable to work, they serve different purposes and have different requirements for businesses.

In this post, we’ll explain the differences between workers' compensation and disability insurance, what they cover, what they don’t, and how to determine which one your business needs.

What is Workers' Compensation Insurance?

Workers' compensation insurance is a state-mandated policy that provides benefits to workers who suffer work-related injuries or illnesses. If an employee gets injured on the job, this coverage helps pay for their medical costs, lost wages, and rehabilitation costs.

In most states, businesses with employees are legally required to have workers' compensation insurance to protect both workers and employers from financial and legal risks. This insurance also shields your business from lawsuits. 

When an employee receives workers’ compensation benefits, they typically give up the right to sue your business for the injury. This helps you avoid costly legal battles while ensuring your employees get the care they need.

What Does Workers' Compensation Insurance Cover?

Workers' compensation insurance helps cover the expenses related to the following key areas:

• Medical expenses: Covers the cost of emergency treatment, doctor visits, hospital stays, medication, and physical therapy for work-related injuries or illnesses.
• Lost wages: Provides partial income replacement for employees who are unable to work while recovering from their injuries.
• Disability benefits: Covers temporary or permanent disabilities caused by workplace injuries, ensuring employees receive financial support if they cannot return to work.
• Rehabilitation costs: Pays for vocational training or therapy if an employee needs to learn new skills due to their injury.
• Death benefits: Provides financial help to an employee's family who dies due to a work-related accident or illness.

Who Needs Workers' Compensation Insurance?

Most states demand businesses to carry workers’ compensation insurance as soon as they hire their first employee. However, the specific requirements vary by state. Some key factors that determine if you need this coverage include:

• Number of employees: Many states require coverage for businesses with one or more employees, while others set the threshold at five employees or more.

For example, California and New York mandate coverage for any business with at least one employee, whereas Florida requires it for most non-construction businesses only if they have four or more employees. Since requirements vary by state, it’s important to verify local laws to determine when coverage is necessary.

• Industry risk level: High-risk industries such as construction and manufacturing often have stricter workers' compensation requirements.
• Independent contractors and sole proprietors: While not always required, some contractors purchase workers' compensation to meet contract requirements or protect themselves from medical expenses in case of a work-related injury.

What is Disability Insurance?

Disability insurance provides income relief for workers who cannot to work due to a non-work-related injury or illness. Disability insurance differs from workers' compensation by covering medical conditions, accidents outside of work, and long-term illness that prevent employees from working.

While most states don’t require it, California, New York, and New Jersey mandate disability insurance for eligible employees. Many businesses choose to provide disability insurance as an additional benefit to support employees and attract top talent.

Types of Disability Insurance

There are two types of disability insurance which are:

• Short-term disability (STD) insurance: Provides temporary income replacement, usually covering three to six months of lost wages. Employees typically receive 50% to 70% of their income during their recovery period.
• Long-term disability (LTD) insurance: Covers extended periods of partial or total disability, sometimes lasting for years or until retirement. Benefit amounts typically range from 50% to 70% of an employee’s salary, depending on the policy.

What Does Disability Insurance Cover?

Disability insurance covers the expenses related to the following key areas:

• Serious illnesses: Covers medical conditions such as cancer, heart disease, or neurological disorders that prevent an employee from working.
• Injuries outside of work: Provides financial support for accidents, falls, or injuries that occur outside the workplace.
• Pregnancy complications: Covers employees who need time off due to pregnancy-related health issues or post-birth recovery.
• Mental health conditions: Some policies provide benefits for severe depression, stress, or other mental health disorders that limit an employee’s ability to work.

Who Needs Disability Insurance?

While not always required, disability insurance is an important benefit for businesses that want to provide financial security to employees. It is especially valuable for:

• Businesses in states with mandatory disability programs: Employers in states such as California, New York, and New Jersey must offer disability coverage to employees.
• Companies offering competitive benefits: Businesses that want to attract and retain skilled employees often include disability insurance in their benefits package.
• Self-employed individuals and contractors: Since disability insurance is not provided through an employer, freelancers and independent contractors often purchase individual policies to protect their income.

Differences Between Workers' Compensation and Disability Insurance

Workers' compensation and disability insurance both deliver financial protection when employees are unable to work, but they serve different purposes. 

Understanding how they differ helps you determine which coverage your business needs to stay compliant and protect your employees. Here are the key differences between workers' compensation and disability insurance:

Both policies play essential but distinct roles in protecting your business and employees. Having the right coverage helps you reduce financial risks, stay compliant with state laws, and ensure your employees receive the support they need during difficult times.

At TWFG Khan Insurance, we specialize in helping businesses like yours find tailored insurance solutions that align with your industry, workforce size, and state requirements. Whether you need state-mandated workers’ compensation, optional disability coverage, or a comprehensive benefits package, we work with top-rated carriers to secure the right protection for your business.

Finding the right insurance can be complex, but our team simplifies the process, ensuring you avoid coverage gaps that could leave your business exposed to financial and legal risks.

What is Not Covered by Workers' Compensation and Disability Insurance?

While workers' compensation and disability insurance provide essential protection for employees, they do not cover every type of claim. Understanding these exclusions is critical to ensuring your business has the right coverage in place and avoids unexpected financial risks. Here’s what workers' compensation and disability insurance do not cover:

• Injuries outside the workplace: Workers’ compensation only covers job-related injuries and illnesses. If an employee is injured at home, in a car accident, or while engaging in non-work activities, workers’ compensation will not apply. Disability insurance may cover these injuries, depending on the policy.
• Pre-existing conditions: Disability insurance generally does not cover medical conditions that existed before the policy was purchased, unless the policy specifically allows it. Workers’ compensation also does not cover illnesses or injuries unrelated to the employee’s job duties.
• Intentional injuries or misconduct: Neither workers' compensation nor disability insurance will cover self-inflicted injuries or those caused by reckless behavior, drug or alcohol use, or criminal activity.
• Independent contractors and self-employed individuals: Most workers' compensation policies only apply to employees, not independent contractors, freelancers, or business owners. Some independent contractors choose to purchase workers’ compensation policies to meet contract requirements or protect themselves from medical expenses.
• Full wage replacement: Workers’ compensation and disability insurance only cover a portion of lost wages—usually 50% to 70%—not the employee’s full salary.
• Employee lawsuits for non-injury claims: These policies do not protect your business against claims of discrimination, harassment, or wrongful termination. You need employment practices liability insurance (EPLI) for those risks.

Gaps in coverage can expose your business to financial and legal risks, leaving you vulnerable to claims that fall outside of these policies. At TWFG Khan Insurance, we help businesses like yours evaluate coverage gaps and secure the right policies to ensure complete protection.

Whether you need workers’ compensation, disability insurance, general liability, or employment practices liability insurance (EPLI), we work with top-rated carriers to customize a plan that fits your industry, workforce, and compliance needs.

How Much Does Workers' Compensation Insurance Cost?

Workers' compensation insurance is required in most states, and the cost varies based on state regulations and industry risks. Companies in high-risk industries like construction or manufacturing typically pay higher premiums than office-based businesses.

• Average cost: Most businesses pay between $0.75 to $2.00 per $100 of payroll, but high-risk industries may pay more.
• Industry risk level: Jobs with higher injury risks (such as roofing or construction) have higher workers' compensation costs.
• State requirements: Each state sets different premium rates, coverage requirements, and benefit limits. Some states offer state-funded workers' compensation programs, while others require businesses to purchase private insurance.
• Claim history: Businesses with a record of frequent claims may face higher premiums, while those with strong workplace safety programs may qualify for lower rates.

How Much Does The Disability Insurance Cost?

Unlike workers’ compensation, disability insurance is usually optional for businesses, unless required by state law. The cost depends on whether the coverage is short-term or long-term.

• Short-term disability (STD) insurance: Costs typically range from 0.25% to 0.50% of an employee’s annual salary. This means a business with a $50,000 salaried employee may pay $125 to $250 per year for coverage.
• Long-term disability (LTD) insurance: Costs range from 0.5% to 3% of an employee’s salary, depending on the benefit amount and coverage length.
• Employer vs. employee contributions: Some businesses pay for disability insurance as part of their package, while others offer it as an employee-paid option through payroll deductions.

Factors That Impact Your Insurance Costs

• Number of employees: More employees mean higher insurance costs, as premiums are calculated based on total payroll.
• Industry and job risk level: Businesses in hazardous industries (such as construction, healthcare, and manufacturing) pay higher premiums than those in low-risk office jobs.
• Claims history: If your business has previously filed multiple claims, your insurance provider may increase your premiums. Maintaining a safe work environment helps keep costs lower.
• State regulations: Some states have set rates for disability insurance and workers' compensation, while others allow businesses to choose private insurers.

Understanding these cost factors helps businesses make informed decisions about budgeting for coverage and selecting the right insurance options. If you're unsure how much coverage your business needs, working with an experienced insurance provider like TWFG Khan Insurance can help you secure the best rates while ensuring full compliance.

Get the Right Coverage with TWFG Khan Insurance

Ensuring your business has the right workers’ compensation and disability insurance isn’t just about compliance—it’s about protecting your business from unexpected costs and legal risks while providing financial security for your employees.

Whether your business is legally required to carry workers’ compensation or you want to offer disability insurance as part of your employee benefits, having the right policy matters.

At TWFG Khan Insurance, we help businesses like yours find tailored insurance solutions that align with state regulations, industry risks, and workforce size. We work with top-rated insurance carriers to provide coverage that protects your business while keeping costs manageable.

Here’s why businesses choose TWFG Khan Insurance:

• Customized coverage: Every business has different risks. We help you secure workers’ compensation and disability insurance policies designed for your industry and employee needs.
• State compliance expertise: With workers' compensation laws varying by state, we ensure your business meets all legal requirements while helping you choose the right level of disability coverage if needed.
• Cost-effective protection: We connect you with top insurance providers to find policies that offer complete coverage at competitive prices.
• Ongoing support: From policy selection to claims assistance, our team simplifies the insurance process, ensuring your business stays protected without unnecessary complexity.

Having the right insurance coverage gives your business financial security and peace of mind. Get a quote with us today and let TWFG Khan Insurance help you find the best coverage for your business.