Although it is not talked about as often as Workers’ Compensation or Social Security Disability, short- and long-term disability insurance are just as important to your financial future as an emergency fund or life insurance. There is no predicting what could happen to you during your working years, so having income backup is extremely important in the event of a lasting illness or injury. In this article, we discuss the differences between short-term disability and long-term disability.
In general, long-term disability is a better option for people because the coverage lasts longer, and policies tend to be more cost-effective; however, long-term disability polices are more expensive than short-term disability policies. Short-term disability can be a helpful supplement to long-term disability coverage, but it usually is insufficient on its own.
To make sense of the differences between short-term and long-term disability, it is helpful to compare their respective benefit periods, elimination periods, average costs, and how the policies can be obtained. Short-term disability’s benefit period lasts between 3 and 6 months, whereas long-term disability’s benefit period can be 2 years, 5 years, 10 years, or until retirement. The elimination period (the amount of time you have to wait before your disability coverage begins) for short-term disability is less than 14 days; for long-term disability, it can range from 30-720 days, but 90 days is typical. The longer the elimination period, and the longer you go without accessing the benefits of your policy, the less expensive the policy will be. Conversely, the longer the benefit period, the more expensive your policy will be.
Another difference between short-term and long-term disability is the purpose behind each. Shot-term disability is designed to pay a portion of your income for a short period of time after your sick leave runs out. These policies typically do not cover a work-related injury, but they frequently cover other disabling injuries, childbirth, and prolonged illnesses. Long-term disability, on the other hand, usually provides coverage until you return to work, you are no longer disabled, or you reach retirement age under Social Security.
The average cost for both kinds of disability policies is 1-3% of your annual salary. Both policies are usually employer-sponsored, but you can purchase long-term disability coverage from a private carrier as well. Employer-sponsored policies can be handy and cost-effective, but remember that your coverage disappears if you are fired or choose to leave. Your employer might give you the opportunity to purchase the same policy on your own, but it will likely be significantly more expensive.
The average disability lasts three years, so you can see why short-term disability coverage is frequently insufficient and is most beneficial as a supplement to a long-term disability policy. Another difference between short-term and long-term disability coverage is that short-term disability policies usually provide 80% of your income, and long-term disability policies typically provide 60%. Unlike wages, however, disability benefits are not taxed.
If you are in the market for a disability policy, remember that there are a few factors that will contribute to the cost of your policy, regardless of whether it is a short-term or long-term policy. The most important ones are your occupation, health, age, and location. Make sure you review the potential providers. Only choose one that has high ratings from AM Best or the Better Business Bureau.