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Short term vs. long term disability insurance, explained

Short term disability is ideal for temporary conditions you expect to recover from, whereas long term disability is designed for serious injuries and illnesses lasting months or years — even permanently.

You’ve probably met more life insurance salespeople than disability insurance salespeople. The reason? People buy much more of the former than they do the latter. But is that a sound buying decision?

Statistically, you’re actually more likely to become disabled during the course of your career than you are to die.

  • According to the National Safety Council, a fatal injury occurs every 5 minutes and a disabling injury every 1.5 seconds.
  • The Federal Home Loan Bank has determined the primary cause of mortgage loan foreclosures is the mortgage becoming disabled, 48%, versus 3% due to death.

The numbers say it all. But when it comes to taking action and purchasing a policy, confusion hits quickly. For starters, which type of disability insurance — short-term vs. long-term — is better for your income protection needs? Here, we cover the key differences between each to help you decide.

Definition of disability

A good place to start is with the definition of disability. The language is going to vary from insurer to insurer, but most will have a variation of two different definitions of disability.

A policy with an own-occupation definition of disability will pay benefits if you are unable to perform the duties of your specific job occupation. Sometimes the definition by an insurance company is more restrictive, like: “unable to perform the duties of your own occupation or another for which you are reasonably suited.”

For example, a surgeon who lost a finger in an accident and could no longer operate would prefer the first definition. In contrast, he could teach university classes with the “reasonably suited” definition because of his advanced training and education.

On the flipside is the any-occupation definition of disability, which means you will only receive benefits if the disabling event you experience prevents you from working at any job in any capacity. This definition of disability is far more restrictive for benefits.

That said, both short-term and long-term policies may come with either an own-occupation or any-occupation definition of disability.

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Benefit amount

The benefit amount is the percentage of your earnings that your disability insurance policy states will be paid if you are sick or injured and can’t work.

Short-term disability insurance policies usually will pay about 70% of your pre-tax earnings. Though the premium you pay for this coverage is not tax-deductible, the benefit amount paid to you is not taxed as income. This means that even though you’re only receiving 70% of your regular income, it’s very close to what you net at work because of the taxes that are taken out of each paycheck.

Long-term disability insurance policies will pay out anywhere from 60% to 70% if you become disabled (also income tax-free). This may be a lower percentage than some short-term policies, but keep in mind that the benefit period can be much longer with a long-term disability policy.

Deciding the benefit amount that would be right for you involves calculating your monthly expenses and an extra amount in consideration of additional medical bills (i.e., insurance deductible, co-pays, out-of-network provider costs) you might have to pay due to a serious injury or illness. Then determine the portion of your income you’d need to cover those expenses if you become disabled.

Benefit period

The most significant difference between short-term and long-term disability insurance policies is the amount of time you’ll receive benefits if you can’t work. This period of time is called the “benefit period.”

Short-term disability policies, as the name implies, are meant to cover you for a short period of time following an injury or illness that keeps you away from your job. The amount of time is going to vary, but 3 – 6 months is typical.

Long-term disability insurance policies are intended to pay benefits to you for a more extended period. The benefit period is usually stated in years: 2, 5, 10, 20 years, or until you reach retirement age (typically 65 years old).

Waiting period

You can think of the waiting period (also known as the “elimination period”) much like you would the deductible of your home or auto policy. On your property and casualty insurance, the higher your deductible is – the lower the premium is.

The waiting period for short-term disability insurance is usually less than 14 days, whereas the waiting period for long-term disability insurance ranges from 30 days to two years. The most common waiting period for long-term disability is 90 days.

Between having short-term disability insurance and liquid savings, you can select a much longer waiting period for a long-term policy and significantly lower your cost.

Cost of coverage

Many factors determine the premium amount of a disability policy, short-term or long-term. They include:

  • Age
  • Health
  • Occupation
  • Location
  • Benefit period
  • Waiting period
  • Benefit amount
  • Extra riders added

A good rule of thumb: 1% to 3% of your annual salary is reasonable for a disability insurance policy. A long-term disability policy will likely cost more per month than a short-term disability policy. However, side-by-side, long-term disability insurance is a much better value purchase than short-term coverage because of the potential total benefit if you were to become disabled.

Learn More: Cost of Disability Insurance

Leading causes of claims

Even though many people only think of a disability being caused by an accident, illness (physical and mental) is also a leading cause of claims.

According to the Council for Disability Awareness, the most common reasons for short term disability claims are:

  1. Pregnancies (25%)
  2. Musculoskeletal disorders affecting the back and spine, knees, hips, shoulders, and other parts of the body (20%)
  3. Digestive disorders, such as hernias and gastritis (7.8%)
  4. Mental health issues including depression and anxiety (7.7%)
  5. Injuries such as fractures, sprains, and strains of muscles and ligaments (7.5%)

The council cites the most common reasons for long term disability as being:

  1. Musculoskeletal disorders (29%)
  2. Cancer (15%)
  3. Pregnancy (9.4%)
  4. Mental health issues including depression and anxiety (9.1%)
  5. Injuries such as fractures, sprains, and strains of muscles and ligaments (9%)

One study of bankruptcy filings in the state of Washington found that cancer patients were 2.65 times more likely to go bankrupt than people without cancer. Disability doesn’t discriminate between illness and injury.

Which is better to have?

The Texas Medical Association has determined that an individual's average length of a disability insurance claim lasts 31.6 months. It’s apparent that a short-term disability policy with a benefit period of 3 – 6 months is not going to be sufficient to protect someone for the average length of disability. Very few people have two or more years of liquid savings to draw upon if they have short-term disability insurance but don’t have long-term disability coverage.

A good question to ask yourself: “If I was to become permanently disabled, could I cover my expenses until retirement?” Your answer to this question is the best determinant of your need for long-term disability insurance.

Having grown up in upstate New York, Bob Phillips spent over 15 years in the financial services world and has been making freelance writing contributions to blogs and websites since 2007. He resides in North Texas with his wife and Doberman puppy.

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.

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