Every disability insurance policy is designed to protect your income from injury and illness. But some types of coverage are stronger than others. So how do you truly know which type of disability insurance is best for your financial needs?
In this comprehensive guide, we cover everything you need to know about short term disability insurance.
- What is short term disability insurance?
- How does short term disability insurance work?
- What does short term disability insurance cover?
- How much does short term disability insurance cost?
- How to apply for short term disability insurance
- Is short term disability insurance taxable?
- Is short term disability insurance worth it?
Read on to learn more.
Short term disability insurance replaces a percentage of your income if you experience a temporary injury or illness that prevents you from working. It is ideal for disabling events that may limit the ability to work, but people generally recover from — such as a plumber breaking a hand, a pilot undergoing back surgery, or a pregnant teacher giving birth. Short term disability coverage can be obtained individually from a private insurance company or as a part of a group, typically through your employer.
To get a better idea of how short term disability works, let's start by answering some FAQs:
- How much does short term disability pay? If you qualify for short term disability benefits, you will typically be reimbursed for about 60 percent of your lost wages. Depending on the policy, the benefit may be as low as 40 percent or as high as 70 percent. Most policies have a benefit cap as well.
- When does short term disability start? Before short term disability benefits kick in, there is typically an elimination period of 14 days. However, this waiting period may be as short as one week or as long as one month.
- How long is short term disability? Short term disability benefits generally last around three to six months. However, some plans may pay as long as one or even two years.
But that's just the tip of the iceberg. Let's take a closer look by comparing short term disability insurance side-by-side to other similar types of coverage.
Short term disability vs. long term disability
The main differences between short term and long term disability insurance are:
- The injuries and illnesses they cover.
- How long you can receive disability benefits.
- How long you have to wait following a disabling event to receive compensation.
|Coverage Comparison||Short Term Disability||Long Term Disability|
|Benefit amount||40-60% of income||60-80% of income|
|Benefit period||3-6 months||1, 2, 5, 10 years; to age 65 or 67|
|Waiting period||1, 7, 14, 30 days||30, 60, 90, 180, 365 days|
You shouldn't skip long term disability insurance coverage in lieu of having just a short-term policy. Short term coverage will not be adequate in the event you suffer a serious injury or illness. Without long term coverage, you could find yourself without any kind of income after just a few months.
The best strategy is to buy an individual long term disability insurance policy; then supplement it with any short term and/or long term group plans your employer may offer. By combining different types of coverage, you can protect your income against just about any type of injury or illness that would affect your ability to earn an income.
Short term disability vs. workers' compensation
It's important to remember that short term disability insurance is different from workers' compensation insurance, which provides coverage for injuries that occur on the job. Nearly 90 percent of disabilities are not work-related. Therefore, they are not covered by workers’ compensation.
If an injury or illness that limits your ability to work was caused by something unrelated to your job, workers' compensation will not cover your lost income. Likewise, if you are injured or get sick from performing your job, short term disability insurance likely will not provide benefits during your absence from work.
Short term disability vs. FMLA
People also sometimes confuse short-term disability with the Family and Medical Leave Act (FMLA). The FMLA is a federal law that protects workers who need time off for various family and medical reasons. It stipulates that you must be given up to 12 weeks of unpaid time off for:
- Having children.
- Health problems.
- Taking care of sick family members.
The law also protects you from being dismissed from your jobs while taking a leave of absence that is covered by the law.
However, the law does not provide a replacement for any income you might lose while taking leave (though some employers do provide paid leave for certain circumstances). Plus, there are several qualifications to be eligible for FMLA leave:
- Employees must have worked at the employer for 12 months and 1,250 hours.
- Also, it only applies to employers with 50 or more employees.
Short term disability vs. SSDI
Another common belief is that Social Security Disability Insurance (SSDI) can cover temporary disabling events. While this is true in some cases, SSDI benefits are the most difficult to qualify for.
Social Security generally will not consider you disabled if you work and earn more than $1,220 in a month. If you are not working, Social Security will consider whether you can work. If you can, you will not qualify for SSDI benefits - even if it’s not the type of job you did before your injury or illness.
According to the Social Security Administration, only 34 percent of SSDI claimants had their applications approved from 2006 to 2015. Even if you qualify for SSDI, benefits will likely replace only a small fraction of your income. The average monthly disability benefit in 2017 was $1,172.
Short term disability insurance covers temporary injuries and illnesses that are less serious in nature. Like long term coverage, what qualifies for short term disability depends on the definition of disability, which varies from policy to policy. In general, eligibility for benefits is tied to your ability to perform the duties of your current occupation.
Your short term disability insurance policy may also require that you lose a certain percentage of earnings due to disability. During your short term disability leave, you may be required to provide the insurance company with updated medical information to verify your disability and continued eligibility for benefits beyond the initial approval of your claim.
In addition to injuries and illnesses that limit your ability to work, surgical procedures that are deemed medically necessary will qualify you for short term disability benefits. Some policies will provide benefits for bariatric weight-loss surgeries. Organ donation is usually covered as well. Purely cosmetic procedures will likely not be covered.
You may also qualify for benefits if prescription medications or medical procedures cause side effects that keep you from working.
Does short term disability cover pregnancy and maternity leave?
Maternity leave is one of the most common uses of short term disability insurance. Many policies pay benefits up to six weeks after a normal delivery. For a C-section, women may receive up to eight weeks of benefits.
Keep in mind that benefits are subject to the policy’s waiting period. If the policy has a seven-day waiting period, benefits start seven days following delivery.
It’s also very important to understand that pregnancy is considered a pre-existing condition. That means if you were pregnant prior to signing up for coverage and your policy limits benefits for pre-existing conditions, you would receive limited or no benefits for pregnancy-related time off.
If there are complications resulting from the pregnancy or delivery, you may qualify for additional benefits, either before or after delivery. This will require certification from your doctor.
What doesn't short term disability insurance cover?
Your short term disability insurance policy will likely include coverage exclusions. These will be listed in your policy contract.
Exclusions mitigate a carrier’s risk of paying a claim resulting from high-risk conditions or activities, and typically include:
- Intentionally self-inflicted injuries
- Active participation in a riot
- Loss of professional or occupational license or certificate
- Commission of a crime
- Job-related sickness or injury that would be covered by workers' compensation.
- Acts of war
- Criminal activities
In addition, short term disability insurance companies often disqualify people with pre-existing conditions from obtaining coverage or receiving benefits related to their condition. These may include:
- Heart disease
- Neurological disorders
Furthermore, don’t count on short term disability policies to cover time off to care for a sick family member or adopt a child.
If you have short term disability insurance through your employer, many of these plans require that you've worked a certain amount of time before coverage begins. Many employers also require that you exhaust paid sick leave or use paid time off before you are eligible for short term disability benefits.
The cost of short term disability insurance is determined by the underwriting process. The underwriting for short term disability insurance may differ slightly from long term disability policies.
Individual long term disability insurance requires full underwriting. Insurers have to assess a person’s risk of filing a claim because benefits may be paid out for a long period. Therefore, insurers will assess your application based on your age, health, gender, the level of risk associated with your job, and any hobbies or interests that could cause disability.
On the other hand, disability insurance carriers may not fully underwrite short term policies. As stated earlier, many short term policies sold on an individual basis are guaranteed issue, which means no underwriting. Others may only require the answering of questions about your health without the medical exam required for long term disability insurance.
Injuries that cause temporary disabilities generally are not related to the insured’s age, health, job, or other risk factors. They just happen, be it a bad fall that causes a broken bone or a complication of pregnancy. Still, you may be asked about pre-existing health conditions that disqualify you from coverage or that will limit your benefits.
The main factors that affect the cost of short term disability insurance include:
- Your income. Short term disability insurance policies typically pay 60 percent to 70 percent of your gross income. Therefore, the more you earn, the more you will receive in benefits, and the more you will pay in premium. Keep in mind that there may be a cap on benefits regardless of your income. This cap generally ranges between $5,000 and $6,500 a month.
- Benefit length. Short term disability insurance policies often give you a choice for how long you will receive benefits. Typical benefit periods for short term disability are three months, six months, one year, and two years. The longer you receive payments, the more you pay in premium.
- Elimination period. All disability insurance policies include a waiting period, often referred to as an elimination period. It’s the period of time between when a disability occurs and when benefits are paid. Just like the deductible on property insurance, it’s the part you pay out-of-pocket before benefits kick in. The longer the waiting period on disability insurance is, the lower your monthly premiums will be.
In the best-case scenario, you are able to get short term disability coverage for free (or at least at a reduced cost) through your employer. If not, here are estimates of what an individual policy may cost for different types of individuals:
Scenario 1: $105 per month for somebody between the ages of 18 and 35. The hypothetical policy has a 14-day waiting period, a 6-month benefit period, and a $3,500 monthly benefit (70 percent of the income for somebody earning $60,000 a year). It would be:
- $126 per month for the same policy with a 7-day waiting period.
- $135 per month for the same policy with a $4,500 monthly benefit (about 70 percent of the income for a person earning $78,000).
- $150 per month for the same policy with a 12-month benefit period instead of six months.
Scenario 2: $97 per month for somebody between the ages of 36 and 45. The hypothetical policy has a 30-day waiting period, a 12-month benefit period, and a $3,000 monthly benefit (about 70 percent of the income for a person earning $51,000). It would be:
- $161 per month for the same policy with a $5,000 monthly benefit (about 70 percent of the income for a person earning $85,000).
- $145 per month for the same policy, only with a 14-day waiting period.
- $68 per month for the same policy, only with a 6-month benefit period.
Scenario 3: $77 per month for somebody between the ages of 46 and 55. The hypothetical policy has a 7-day waiting period, a 3-month benefit period, and a $2,000 monthly benefit (about 70 percent of the income for a person earning $34,000). It would be:
- $135 per month for the same policy, only with a $3,500 monthly benefit (about 70 percent of the income for a person earning $60,000).
- $129 per month for the same policy, only with a 12-month benefit period.
- $43 per month for the same policy, only with a 30-day waiting period.
Many employers offer short term disability insurance coverage to employees as a group plan. Many companies even pay the full premium for their employees. A handful of states require employers to provide this coverage.
If you cannot get short term disability through an employer or other group membership, you can buy an individual policy. This can be done through an insurance agent or directly from an insurance company that offers this type of coverage.
Group plans are guaranteed issue, meaning you automatically qualify for coverage without going through underwriting. Short term policies sold on an individual basis are sometimes guaranteed issue as well.
However, most short term policies sold directly to an individual will require the applicant to answer health-related questions. These questions will ask whether you are currently or in the past have been treated for any number of pre-existing conditions. If so, you may be disqualified for getting coverage or have your benefits limited.
How to apply for short term disability benefits
To receive benefits, you will have to submit a claim to the insurance company. This involves filling out a form, be it a printed version or online. The form will ask the date you last worked, a description of your medical condition, and other pertinent information. Your employer and physician will have to complete sections of the form as well.
Once you submit the claim form, the insurance company will review medical records to determine if you meet the definition of disability as defined in the policy. If your policy does not cover pre-existing conditions, the insurer will look for evidence of undisclosed conditions.
The premiums you pay for short term disability insurance are not tax-deductible. However, any policy benefits you receive will be tax-free income. This is true whether you’re buying a group plan or your own individual policy.
If your employer pays the premiums without including the cost in your gross income, the policy’s benefits will be taxable income.
Consult a tax advisor with questions about the tax treatment of disability insurance premiums and benefits.
Most advisers will tell you not to buy a personal short term disability policy. In many cases, it may be just as expensive as long term coverage, but will only offer benefits for a much shorter period of time. A wise alternative to buying temporary disability coverage is setting aside an emergency fund to have in the event you miss work for a few months.
Individuals with pre-existing conditions are also advised not to buy short term disability insurance. In most cases, they would not even qualify for coverage. And those who can get a policy will have a longer waiting period to receive benefits, perhaps 12 months or more. As if that's not enough reason to steer clear, most short term policies will not provide benefits if your disability is related to your pre-existing condition.
If you can get short term disability insurance from your employer or another group at a reduced cost or no cost at all, do not hesitate to take advantage. Even if you have this as an option though, you should also save money in an emergency fund. That’s because most short term disability policies will only pay a fraction of your income in benefits. You may need to rely on a savings account to bridge that gap and avoid going into debt.
Jack Wolstenholm is the head of content at Breeze.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.