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Short-term vs. Long-term Disability Insurance

Licensed Life Insurance Agent/Staff Writer
February 28, 2020
What’s the difference, and which one is best?

Disability insurance helps cover missed paychecks in the event of an injury or illness, and it’s a crucial tool in the insurance shed.

Much like life insurance, disability insurance is one of those “adulting” things in life that nobody wants to think about but that everybody needs to examine. Especially considering that over one-fourth of 20-year-olds today will experience a disability for at least a year before they retire, disability insurance should play a role in every adult’s emergency plan.1

Some states (New York, New Jersey, Rhode Island, California, and Hawaii) provide short-term disability benefits. There’s also workers’ compensation. And there’s federally provided Social Security Disability Insurance (SSDI). But in terms of coverage, workers’ comp covers only accidents on the job, and SSDI is notoriously difficult to qualify for.

In other words, it’s a good idea to have a backup plan.

Two types of disability insurance

Whether it comes from your employer or you purchase it on your own, you’ll likely encounter either short-term disability (STD) insurance or long-term disability (LTD) insurance. We’ll get into the differences below.

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Which is better, short-term disability or long-term disability?

Generally, long-term disability is better in terms of utility, cost, and coverage than short-term disability—but it depends on what your employer offers.

Most experts recommend purchasing long-term disability insurance even if your company doesn’t offer either short-term disability or long-term disability insurance. Long-term disability insurance delivers a lot more bang for the buck because it’s generally the same cost or cheaper than short-term disability insurance. And if you have an emergency fund in place, you already have the cash on hand that a short-term disability insurance policy would provide. So, paired with an emergency fund, LTD insurance provides the coverage you need when you’ll likely need it the most—after you’ve spent down your cash reserves.

STD insurance is more of a “nice to have” sort of thing. However, short-term disability policies can often be prohibitively expensive in the individual marketplace.

What about employer-sponsored disability insurance?

If your company offers disability insurance—long, short, employer-paid, employee-paid, or both—it’s worth considering.

Disability policies issued to groups are typically much cheaper than those on the individual marketplace. Group disability insurance is one of the biggest perks you can take advantage of through an employer, so if you can get it through your company, it’s probably worth it. If they offer only short-term disability insurance, great—you can use that to supplement an individual long-term disability policy that you purchase on your own.

Alternatively, if they offer both long and short-term disability policies, you could get both. Just understand that if you change jobs or get laid off, you’ll lose both policies. That’s why some people are more comfortable having an individual LTD policy, which is far more portable.

Detailing short-term disability insurance

The primary purpose of short-term disability insurance is to get cash quickly after an accident or illness—hopefully sustaining you until you’re able to work again. In extreme cases, it helps bridge the wide gap of a long-term disability elimination period (waiting period), making it easier to endure if your disability persists beyond a few months.

Elimination period

Short-term disability insurance usually comes with an elimination period of zero days to around a week. Practically speaking, your coverage could kick in almost immediately after an accident. However, there might be a separate elimination period for sickness, perhaps 7 days, but up to 90 days. The cheapest policies will come with a 180-day elimination period.

Benefit period

A benefit period is the maximum amount of time you’ll receive payment from a policy. The benefit period for a typical short-term disability policy will last anywhere from 3 months to 12 months, with some policies providing benefits for up to 2 years.

Tip: When coordinating your short-term and long-term disability plans, it’s a good idea to get a benefit period that’s the same length as your long-term disability policy’s elimination period. That way, you won’t have a gap in payments between your disability policies.

Benefit amount

The most you’ll likely get from a short-term disability policy is about 60% of your income. If you paid the premiums yourself, you’ll receive the disability payments tax free. If your employer paid for the premiums, the benefit will be taxable income.

Employer-provided benefit

According to a survey conducted by the Society for Human Resources Management, 78% of employers offer short-term disability to employees.2 As a result, you’re most likely to find a short-term disability plan through your workplace. But if you’re self-employed or your employer doesn’t offer STD insurance, there are individual plans out there too.

Detailing long-term disability insurance

Long-term disability insurance is for more than just breaking an arm or catching a nasty virus: These policies provide for you when you’re going to be laid up for a while. Many who experience a long-term disability often need to get by without a paycheck for a while—spending their limited sick time, vacation pay, and personal savings to stay afloat. Finally, once the long-term disability policy’s elimination period ends and payments begin, they can take a deep breath knowing they’ll be covered for the long haul.

Of course, it’s possible to stack short-term and long-term disability policies so you don’t have to spend your savings to live. More on that later.

Elimination period

Long-term disability insurance typically requires a longer waiting period than short-term disability insurance. A typical elimination period for a long-term disability policy is 90 days, but it could be as short as 30 days or as long as 2 years. As you might expect, a policy with a 30-day elimination period would likely be quite expensive, while a 2-year elimination period would make a policy as cheap as possible.

Tip: If you’re buying a long-term disability policy to stack onto your existing short-term disability insurance, try to adjust your LTD policy’s elimination period to be the same length as your STD policy’s benefit period. That way, you won’t have to go without an income stream for long.

Benefit period

You’ll usually receive benefits from an LTD policy for at least two years. At most, you can get payments until you turn 67. You can typically decide how long you want your benefit period to be, but the longer it lasts, the more expensive your premiums will be.

Benefit amount

You’ll likely see benefit amounts of 50% to 60% of your pre-disability income, but it’s not uncommon to get higher percentages depending on your policy. If you’re paying for your long-term disability insurance out of your own after-tax dollars, you’ll receive these benefits tax free.

Employer-provided benefit

The Society for Human Resource Management’s survey revealed that 63% of companies offer long-term disability insurance to employees.3 If you can’t get a policy through your employer, there are plenty to choose from out in the wild.

The bottom line: LTD insurance wins vs. STD insurance

Short-term disability insurance is nice to have, but long-term disability insurance is likely a must-have. If you can get either through your employer, it’s a great perk. But if you can only get one, get long-term disability insurance.

What’s next?

Sources

1 Social Security Administration, “Disability and Death Probability Tables for Insured Workers Born in 1997

2 Society for Human Resource Management, “Get Disability Benefits on Employees’ Radar

3 Society for Human Resource Management, “Get Disability Benefits on Employees’ Radar

Written by
Alex Enabnit
Alex is a licensed life insurance agent who has appeared on Yahoo Finance, HealthPopuli, and Good Morning Arizona. He writes factual, useful, and occasionally amusing articles about life insurance. Believe it or not, he enjoys researching the intricacies of life insurance and helping people choose the best policies for their specific needs—almost as much as he enjoys kayaking and long hikes.