Consumer Insurance Handbook – Consumer Insurance Handbook What Is the Distinction Between Short-Term and Long-Term Disability Insurance?
If you want to protect your income with insurance, the first decision you must make is what type of insurance you require.
Disability insurance is a type of policy that pays you an income if you become ill or injured and are unable to work. The decision between buying short-term disability insurance and long-term disability insurance will be influenced by what you want to protect.
Disability Insurance for the Short Term (STD)
Short-term disability insurance is a type of insurance policy that provides income for a limited time if you become unable to work due to illness or injury. You usually only have to be out of work for a week or two before receiving benefits, and they are usually payable until you return to work, or for up to 3 to 6 months, whichever comes first. Individual preferences and budgets can be accommodated by tailoring these periods. Receiving payment sooner and for a longer period of time raises the cost. Waiting longer to be paid benefits after a claim, as well as receiving claim benefits for a shorter period of time, lowers the cost of the insurance.
Short-term disability insurance is typically used when you will be unable to work due to surgery or a serious but limited illness such as pneumonia. Maternity leave is NOT covered by any individually purchased STD plan, but many employer-provided STD plans DO pay benefits for pregnancy leave disability.
Individual STD policies will pay benefits if you are unable to work at your current job and are not working in another. If you decide to work in another capacity, your benefits will be terminated. This is usually not a problem because most people on short-term disability expect to recover and return to their previous job within 3 to 6 months.
Short-term disability insurance is a good option for those who do not have this coverage through their employers and do not have the financial savings to sustain themselves financially for a 3-6 month period without income. Short-term disability insurance is not an adequate solution to the catastrophic problem of long-term loss of ability to work.
Disability Insurance for the Long Term (LTD)
People requires long-term disability insurance to protect their income from catastrophic financial loss. It is generally more sought after than short-term disability insurance because the consequences of being out of work for many years, or permanently, are far greater than the consequences of being out of work for three months or less.
A typical long-term disability insurance policy will begin paying benefits three months after filing a claim due to sickness or injury. This period is known as the policy’s elimination period, and it is standard in these plans. A longer waiting period to collect on a claim lowers the premium amount, while a shorter waiting period raises the premium amount. The waiting periods can be tailored to the individual’s preferences and financial constraints. Once benefits are received, LTD plans will frequently pay claims until the insured returns to work, or even until the age of 65.
Individual STD and LTD policies differ significantly in that an LTD plan can be tailored to protect someone in their specific occupation, even if they return to work in another capacity. Because a long-term claim can last for many years, the insured may have to retrain to return to their previous occupation. In this case, the coverage must continue to pay benefits because the income from the new occupation is unlikely to be as high as the income from their previous occupation. Having an LTD policy that continues to pay benefits in this situation restores the insured’s income to where it was before the disability.
Anyone who relies on their income to pay the mortgage, save for a child’s education, put food on the table, and pay their bills needs long-term disability insurance. After all, the bills will not stop just because you are unable to work.
So, which type of disability insurance is best for me?
Short-term and long-term disability insurance both have a place in financial planning. Short-term disability insurance is a good option for people who don’t have 3-6 months of savings and want to avoid going into debt or missing a rent or mortgage payment due to a serious illness or surgery. Long-term disability insurance provides the necessary income protection in the event of a less common, but more catastrophic, event.
Most people will choose to have both to ensure that they are protected in both scenarios. If you must choose, most insurance and financial planners will advise you to self-insure the short-term risk while transferring the longer-term, more significant risk to the insurance company via a good long-term disability insurance policy.