Consumer Insurance Guide – Consumer Insurance Guide What are the Differences Between Short and Long Term Disability Insurance?
If you’re looking for insurance to protect your income, the first decision you have to make is what type of insurance you need
Disability insurance is a type of policy that provides an income in the event you become sick or injured and cannot work. The decision on whether you buy short-term disability insurance or long-term disability insurance will depend on what you’re trying to protect.
Short Term Disability Insurance (STD)
Short-term disability insurance is a type of insurance policy that provides income for a short period of time if you become too sick or injured to work. You typically have to only be out of work for a week or two before the benefits begin and they are usually payable until you return to work, or up to 3 to 6 months, whichever comes first. These time periods can be customized to suit individual preferences and budgets. Getting paid sooner, and for a longer period of time, increases the cost. While waiting longer to be paid benefits after a claim, plus being paid claim benefits for a shorter amount of time, reduces the cost of the insurance.
Short-term disability insurance is typically used for situations where you will be out of work due to a surgery, a significant but limited illness like pneumonia. It is important to note that maternity leave is NOT covered under any individually purchased STD plan, although many employer-provided STD plans DO pay benefits for pregnancy leave disability.
An individual STD policy will pay benefits if you are unable to work at your occupation AND you’re not working in another occupation. If you decide to work in another capacity, the benefits would end. This is not usually a problem, since most people who live on short term disability claims are expecting to recover and return to their previous job within a 3 to 6 month period.
Short-term disability insurance is a good option for those that don’t have this coverage available to them from their employers, and who don’t have the financial savings to financially self-sustain a 3-6 month period without income. Short-term disability insurance is not a good solution for a catastrophic problem of a long -term loss of the ability to work.
Disability Insurance (LTD)
Long term disability insurance is what people need to protect their income from catastrophic financial loss. It is generally more sought after than short-term disability insurance, since the effects of being out of work for many years, or permanently, are far greater than the effects of being without an income for 3 month or less.
A typical long-term disability insurance policy will start paying benefits after 3 months of filing a claim after being out of work due to sickness or injury. This waiting period is called the policy’s elimination period and is standard in these plans. A longer waiting period to collect on a claim reduces the policy’s premium amounts and variably a shorter waiting period increases the premium amount. The waiting periods can be tailored to the individual’s preferences and budget. Once receiving benefits, LTD plans will many times pay claims until the insured returns to work, or even until retirement age 65.
One significant difference between individual STD and LTD policies is that an LTD plan can be customized to protect someone in their specific occupation, even if they go back to work in another capacity. Since a long-term claim can last for many years, it is possible that the insured will retrain to do something else, without being able to return to their previous occupation. In this case, it’s important that the coverage continue to pay benefits since it’s likely that the income from the new occupation won’t be as high as their previous occupation. Having an LTD policy that continues to pay benefits in this situation gets the insured’s income back more closely to where they were pre-disability.
A long-term disability insurance plan is a necessity for anyone who depends on their income to pay the mortgage, save for a child’s education, put food on the table, and pay their bills. Because after all, the bills will not stop just because you cannot work.
So what kind of disability insurance is right for me?
Both short and long term disability insurance have their place in financial planning. Short-term disability insurance is a good solution for those who don’t have 3-6 months of savings in the bank and want to make sure that a significant illness or surgery doesn’t cause them land in debt or miss a rent or mortgage payment. Long-term disability insurance provides the needed protection of income in the event of a less common, but more catastrophic, event occurring.
Most people will opt to have both to ensure that they are covered from both situations. However, if you have to pick one, most insurance and financial planners will recommend you self-insure the short-term risk, but move the longer term, more significant risk, to the insurance company by way of a good long-term disability insurance policy.