What is disability insurance?

Disability insurance is a type of employee benefit that provides income replacement when a worker becomes unable to perform their job due to illness or injury. Depending on the policy, disability insurance may cover temporary or long-term medical issues and can help employees maintain financial stability while they’re unable to work.

For small business owners, offering disability insurance—either as a voluntary or employer-paid benefit—can improve your benefits package, support employee wellbeing, and ensure compliance with state regulations where coverage is mandated. With tools like Homebase, you can manage employee eligibility, track time off, and keep benefits documentation in order, even if your HR resources are limited.

Types of disability insurance

There are two primary types of disability insurance that businesses may offer:

1. Short-term disability (STD)

• Typically covers a portion of income (50–70%) for a limited period, such as 3 to 6 months
  
  
• Commonly used for recovery from surgeries, injuries, or non-work-related illnesses
  
  
• Often includes a short waiting period (7–14 days) before benefits begin
  

2. Long-term disability (LTD)

• Covers more serious or prolonged conditions lasting several months, years, or even permanently
  
  
• May replace a percentage of income after a 90- to 180-day waiting period
  
  
• Usually provided as a supplemental benefit to STD or workers’ comp
  

How disability insurance differs from workers’ compensation

Workers’ compensation covers work-related injuries or illnesses and is required by law in nearly every state. Disability insurance, on the other hand, typically covers non-work-related conditions, such as an off-the-job injury or long-term illness like cancer or heart disease.

Both can be part of a comprehensive benefits strategy, but they serve distinct purposes and follow different rules.

Why disability insurance matters for small businesses

1. Protects employee income during hardship

Disability insurance helps employees maintain financial security while they recover, reducing stress and increasing loyalty to the business.

2. Reduces pressure on employer resources

Without formal coverage, employees may turn to informal or unpaid leave, which can complicate scheduling, payroll, and morale. Disability benefits provide structure.

3. Supports compliance with state laws

Some states, including California, New York, New Jersey, Rhode Island, and Hawaii, require employers to provide or facilitate access to short-term disability insurance. Requirements vary by state.

4. Improves recruiting and retention

Offering disability insurance—especially when competitors don’t—makes your business more attractive to candidates. It signals that you care about your team’s wellbeing, not just their productivity.

5. Mitigates absenteeism and turnover

Employees who know they have support during a health crisis are more likely to return to work when they’re ready, improving long-term workforce stability.

How disability insurance works for employers

As an employer, you can:

• Purchase a group policy through an insurance provider or broker
  
  
• Offer voluntary coverage, where employees pay 100% of the premium via payroll deductions
  
  
• Contribute partially or fully to premiums as part of a broader benefits package
  
  
• Facilitate enrollment and provide the necessary documents to employees
  
  
• Coordinate with state programs if your business is located in a state with required disability coverage
  

Premiums are typically based on factors such as industry risk, employee wages, and coverage level.

State-mandated disability programs

If your business operates in one of the following states, disability insurance may be required:

• California – State Disability Insurance (SDI) is funded by employee payroll deductions
  
  
• New York – Employers must provide short-term disability for off-the-job injuries and illnesses
  
  
• New Jersey – Temporary Disability Insurance (TDI) is mandatory for most employees
  
  
• Rhode Island – TDI covers non-work-related conditions
  
  
• Hawaii – Employers must provide coverage for eligible workers
  

In these states, employers must comply with specific wage thresholds, waiting periods, and reporting requirements. Failing to do so may result in penalties or lawsuits.

How Homebase helps you manage disability insurance and employee time off

While Homebase doesn’t provide insurance directly, it helps small businesses stay organized when managing leave, tracking eligibility, and keeping records for compliance.

With Homebase, you can:

• Track employee hours and status to monitor eligibility for benefits
  
  
• Manage employee time-off requests, including medical leave and PTO
  
  
• Store HR documentation like benefit elections, disability forms, and leave policies
  
  
• Communicate changes to team members during health-related absences
  
  
• Sync payroll with benefit deductions for voluntary disability plans
  
  
• Stay on top of compliance deadlines in states with mandated disability programs
  

By simplifying team management, Homebase helps you deliver a better experience for your employees—and reduce risk for your business.

Explore Homebase HR & Compliance to streamline benefits tracking, document employee leave, and stay compliant with labor laws across states.