Long Term vs Short Term Disability

When you’re young and healthy, insurance for disabilities isn’t usually at the top of your shopping list. As you age, however, the odds that you will suffer a disability at some time in your life increases. More than one in four 20-year-olds will become disabled before retirement.

We generally think of disabilities resulting from accidents, but medical conditions such as back injuries, cancer, or heart disease are the most likely cause. 

The average length of a long-term disability claim is 34.6 months, according to the Council for Disability Awareness. If you were to become disabled today, would have enough savings to last for nearly three years? With the average family holding having less than $26,000 in savings, a disability could trigger foreclosure and bankruptcy.

What Is Disability Insurance?

Disability insurance can replace some of your income if illness or injury prevents you from working. It won’t cover your entire paycheck but is designed to help you cover your household expenses during the time can’t work.

While there’s no law requiring employers to pay for long-term disability coverage, about half of mid-sized and larger companies offer it to their employees as a benefit. 

If you’re covered through your employer, that’s good news. However, if you were to leave your job, your benefits would end. Unlike health insurance, it’s not something you can continue on your own.

What’s the Difference Between Short Term vs Long Term Disability?

When it comes to short term vs long term disability, the difference is more than just the length of time the insurance will cover.

Long Term Disability

Long-term disability insurance covers you if you are affected by a disability and unable to work for months, years, or permanently.

Benefits will vary by carrier and plan buy are typically designed to replace between 50 to 80 percent of your income. The duration will also vary depending on the plan. Some will cover specific ranges, such as up to 10 years while others will continue to pay until age 65.

Most LTD policies won’t begin paying out until you have been disabled for six months or longer. Short-term disability can help bridge the gap until long-term benefits begin.

• Benefit Period: Most common are two, five, or 10-year periods, or until retirement

• Elimination (Waiting) Period: Typically, six months or more

• Coverages: 50-80% of monthly income

• Average Cost: 1-3% of annual salary

• Offered: Employer-sponsored or through private carriers

Short-Term Disability

Short term disability covers temporary situations that impact your ability to work. It typically pays between 40 and 60 percent of your income. Durations can vary but will generally last for three months, although some policies may last longer.

Some states, such as California, Hawaii, New Jersey, New York, and Rhode Island mandate short-term disability coverage. Other states do not.

• Benefit Period: Most common are three or six months

• Elimination (Waiting) Period: Typically, 14 days

• Coverages: Typically, 40-60% of income

• Average Cost: 1-3% of annual salary

• Offered: Typically, employer-sponsored

You may be able to purchase short-term disability through the private market but most financial experts recommend building up an emergency fund instead of paying the premiums.

Other Disability Programs

If you’ve reviewed your annual Social Security statement - and you should - you may have noticed it lists something called Social Security Disability Insurance (SSDI). Under certain circumstances, SSDI will provide supplemental payments if you are unable to work in any job.

The average SSDI payment is $1,260 per month as of October 2020. The benefits are based on lifetime earnings rather than income, so younger workers will experience significantly smaller amounts. It’s not easy to get benefits either. There’s a mandatory five-month waiting period. It can take three to five months to apply and barely more than a third of claims are accepted.

You may also wonder about Workers’ Compensation insurance. Workers’ Comp laws vary from state to state. It only applies if you are injured or sick while performing your job.

Either way, SSDI or Workers’ Comp won’t be enough to take care of your bills by themselves.

Disability Coverage and Costs

Even if you’re covered by your employer, the amount of coverage may not be enough to pay your monthly bills without additional income. You may be able to purchase additional coverage through your employer or with private carriers although you likely won’t be able to purchase 100% income replacement.

The cost of a disability policy will vary depending on the amount of coverage it provides, your age, and health information. It will also depend on our income, occupation, and the type of coverage terms you want. On average, policies cost between one and three percent of your annual salary through your employer.

How to Get Disability Insurance

The first place to check is with your employer.

• Some employers offer disability insurance as a benefit and pay a portion or the entire amount of the policy

• Some employers offer disability as a voluntary benefit and require employees to pay at pre-negotiated group rates

• You may also be able to buy-up policies to raise your coverage limits

If disability insurance isn’t offered through your employer, you work for yourself, or you’re thinking about changing jobs, you may wish to buy your own disability insurance plan. You can get a policy through an insurance broker or directly from major insurance carriers.

Why Should I Get My Own Disability Insurance Policy?

There are advantages to buying your own policy. One of the biggest advantages is that you can shop around for the best policy that fits your needs.

• It’s portable. If you change employers or lose your job, you still retain coverage

• You can customize the policy to your situation. For example, you may want to take into account cost-of-living adjustments, shorter (or longer) waiting periods, or length of benefit payments.

• Collect benefits tax-free if you become disabled. Under an employer plan, you would likely have to pay the taxes on the benefits.

Shopping for Disability Coverage

If you decide to get disability coverage to take care of you and your family, here are some of the things you’ll want to take into consideration. The answers to each of these questions will have an impact on the policy you would choose.

1. Amount of Income Needed: 

   If you were to become disabled, how much income would you reasonably need to maintain the lifestyle you want?

2. Elimination Period: 

   How long could you afford to wait until benefits started?

3. Payment Length: 

   How long do you need benefits to last?

When shopping for disability coverage, you will have premium options depending on the amount, the waiting period, and payment length. The higher the payout, the shorter the waiting period, and the longer benefits last will lead to higher costs. You’ll need to balance your needs against the cost of premiums.

The type of policy you choose will also play a role in both benefits and costs. 

Most people choose what’s called an Own-Occupation policy. If you’re no longer able to work in a substantially similar role, you may be covered. If you can work in a lower-paying or less demanding role, you may still be able to collect. An Any-Occupation policy would require you to be totally disabled and unable to work in any role before benefits kick in. If you can work in any job, you may not be able to receive benefits.

Some people choose to add a residual disability rider to their policy. This pays benefits even if you are only partially disabled and can still work.

Protect Yourself and Your Family

Going without disability insurance is a big risk. If you were to become disabled, the loss of income coupled with any health or medical costs could be catastrophic. You can’t count on government benefits to provide for you. Social security disability benefits alone pay barely more than the poverty level and certainly not enough to take care of a family.

Make sure you have enough disability coverage through your employer or through a private insurance carrier to protect yourself and your family.