Short-Term vs Long-Term Disability Insurance

What’s the Technical Difference Between Short- and Long-term Disability Insurance?

Distinctions Between Short-term and Long-Term Disability Insurance Policies

Every individual who finds themselves as the sole provider or a household contributor should invest in disability insurance. This type of insurance policy provides compensation for potential income loss in the event of an accident or illness that prevents you from working. This may be in the form of an individual policy or a group policy. 

There are certain types of disability insurance policies that cover a limited period of time, such as a few months. There are also certain types of plans that cover an extended period of time, some even lasting for decades. In any case, the individual needs, budget, and expectations should all be taken into account when deciding which form of disability insurance is best. 

It can be difficult to figure out which form of disability insurance is best for you and your family’s needs during a crisis. It is important to have a thorough understanding of the distinctions between short-term disability and long-term disability insurance benefits. Having adequate coverage through disability insurance ensures you will be protected if faced with a debilitating illness or injury that renders you unable to work. 

Short-term disability insurance may be available through an employer, union, or other professional association for certain individuals. This type of disability insurance policy is referred to as group coverage. You may also buy an individual policy directly from an insurance provider or agent. However, purchasing disability coverage on your own is typically the more expensive route. Adding to this, if you buy your own short-term disability insurance, you’ll almost certainly have to go through medical and financial underwriting. The opposition to this would be guaranteed-issue coverage one would receive if their company has group short-term disability insurance. 

How Does Short-term Disability Insurance Work?

The majority of short-term disability plans are designed in a similar fashion. To be covered, you or an employer must pay a monthly premium. You apply for a benefit by connecting with someone in your company’s human resources department or your insurance provider when an illness or accident prevents you from working. You may be required to cover the cost of taxes on the money received from the disability policy. This is dependent on two things. First, whether the premiums for the disability insurance policy were paid by you or an employer. Second, whether the premiums were paid with pre-tax or post-tax funds. 

Most short-term disability insurance plans require documentation from your primary care physician describing your condition and estimating how long you will be out of work. While short-term disability plans typically kick in within two weeks, there will most likely be a waiting period. A waiting period describes the time between you leaving work and the time you are eligible for disability benefits. 

Before the disability policy kicks in, it is possible that your employer may require you to use some – or all – of your sick days. After the waiting period is over, you will typically be paid a fixed amount of your pre-disability earnings. For instance, if you are paid $1,000 a week and your insurance pays 60 percent of your pre-disability earnings, you will receive a weekly benefit of $600.

Short-term insurance plans typically pay benefits for three to six months. However, some may provide coverage for a year or longer. Keep in mind that benefits stop when the disability policy ends. If you are still unable to function when your short-term disability benefits expire, there is a chance you may be eligible for long-term disability benefits. This of course is only possible if you have a long-term disability policy in place. Depending on your situation, you may be able to qualify for Social Security Disability insurance too. 

Short-term disability claims are often triggered by pregnancy and maternity leave. The Family and Medical Leave Act (FMLA) allows for a maximum of 12 weeks of unpaid leave. Short-term disability benefits can be used to ensure that a new mother retains a part of her regular pay during at least some of her maternity leave. 

Larger companies are expected to provide health insurance to full-time employees under the Affordable Care Act (ACA). According to this statute, full-time is described as no less than 30 “hours of service” per week. The IRS clarified in 2015 that time spent receiving disability benefits – either short- or long-term – is considered qualified “hours of service.” This means an employer must continue to provide health insurance benefits as long as the employee is still considered an “active” employee. The ACA does not require companies to offer disability insurance. However, if they do and an employee is receiving disability benefits, those hours still count towards “hours of service.”

How Does Long-term Disability Insurance Differ?

When a disability prohibits you from working, long-term disability insurance is intended to cover a portion of your wages. This type of insurance pays compensation for much longer than a short-term disability policy. Long-term disability insurance usually doesn’t begin paying benefits until you’ve been out of work for at least a month. It’s not unheard of for that waiting period to last as long as a year or two. 

The majority of plans have a 3-26 week waiting period. However, once the benefit period begins, benefit disbursement lasts for years. They may also continue until you hit retirement age, depending on the type of policy and benefit period. Many employers have both short-term and long-term disability benefits because the two plans can work together. They do so by providing partial income replacement for the disabled worker for almost the entire duration of the disability. 

For long-term disability plans, the potential payouts from a provider are significantly higher due to the amount of time an individual may require benefits. As a consequence, long-term disability insurance will cost more than short-term disability insurance.

How Does Short-term Disability Insurance Differ?

Although most short-term disability policies have similar features, each policy will have its own unique characteristics. 

Disability Definition

A disability, according to some short-term disability policies, is described as the inability to function in your own profession. These are classified as “own occupation” definitions of disability. Other laws describe disability as an inability to work in any profession. This is referred to as “any occupation” when defined under disability. Disability compensation from Social Security is only available in the event of a long-term disability. Their disability benefits are based on the “any occupation” definition.

As a result, if you are unable to return to your previous job but have the ability to perform a different type of work, Social Security will not provide disability benefits for you. Private insurance providers, on the other hand, will have more lucrative coverage in exchange for the premiums that you or your employer pay. 

Service Wait

Some companies only offer short-term disability insurance after you’ve worked with them for a certain amount of time (i.e., six months to one year).

Waiting Period

This is also known as an elimination period. It refers to the interval between being sick or disabled and receiving disability insurance benefits. Waiting periods may range from 0 to 14 days under most short-term disability insurance programs. Premiums are generally lower for plans with a longer waiting period. For various types of disabilities, many short-term disability programs have different waiting periods. For instance, a short-term disability plan may include a seven-day waiting period for an illness but have no waiting period for an accident that occurred outside of the workplace. 

Benefit Rates.

Benefit rates for insurance policies will differ. They will generally range from 40 to 80 percent of your pre-disability earnings. You will have to pay a higher premium if you want the higher rate, however. Over the benefit period, certain short-term disability plans adjust their benefit rates. For instance, your policy may provide 80 percent for the first three weeks once your disability starts, followed by 50 percent for the remaining term of your benefit period.

Benefits Period.

Short-term disability insurance is designed to cover a portion of your wages if you are unable to function for a period of three to six months. Some short-term disability insurance policies will pay benefits for up to two years. This is far less common though because that is what long-term disability coverage is designed for. Long-term disability insurance is meant to provide income replacement for an extended period, not short-term disability insurance. This type of long-term policy continues to pay benefits up to several years. Some plans even pay benefits to retirement age (65 years of age). Because of this, long-term disability insurance costs significantly more than short-term disability insurance. 

You may be allowed to return to work on a trial basis if you have a short-term disability policy. Your policy can, for example, provide you with a two-week trial period. If you return to work for less than two weeks and discover you are unable to adequately perform in your normal job because of the disability, your benefits will continue as if you had never returned to work.

Changes to Policy Premium.

Your insurance provider cannot adjust your premiums or benefits if you sign up for a “non-cancelable” short-term disability policy. If you sign up for a “guaranteed renewable” disability policy however, the insurance provider is entitled to adjust the premiums. They can only do this if the change impacts an entire group of policyholders. Plans that are both non-cancelable and guaranteed renewable have the best coverage but also have the highest premiums. 

Policy Exclusions.

Many policies exclude disabilities resulting from suicide attempts, drug abuse, war, or criminal attempts. Pre-existing conditions are frequently excluded. However, this is usually only a temporary exclusion for employer-sponsored coverage plans. In plain language, once an employee enrolls, an employer-sponsored short-term disability policy may have a one-year waiting period before paying disability benefits related to the employee’s pre-existing conditions. Onsite work-related injuries are also not covered. This type of disability is covered by worker’s compensation insurance. 

How to Acquire Short-term Disability Insurance

Short-term disability insurance covers a percentage of your pre-disability earnings if you become temporarily injured or sick. This means you are, for all intents and purposes, unable to function for a short period of time due to an illness or accident unrelated to your job. Workers’ compensation policies provide income replacement if the disability is caused by a work-related injury. A short-term disability plan would typically pay you 40 to 80 percent of your pre-disability income earnings. 

As a job-related perk, an employer may provide short-term disability insurance as part of an employee-related package. If an employer provides short-term disability insurance, you have the ability to enroll during the initial enrollment period, which is when you become eligible for benefits. You can also enroll during the open enrollment period. This is generally offered by an employer on an annual basis.

If you have a pre-existing condition, an employer may require that you have short-term disability coverage before their policy kicks in. This is known as an exclusionary period. The Affordable Care Act eliminated pre-existing condition waiting periods and exclusions for health insurance benefits. However, rules related to disability insurance were not changed. The fine print of an employer’s short-term disability insurance policy will explain how pre-existing conditions are treated. 

The laws governing short-term disability benefits differ from one state to the next. Check with your state’s insurance department if you believe your employer or insurer is not treating you equally. The National Association of Insurance Commissioners’ website provides links to your state’s insurance department. 

If you are self-employed or do not have access to short-term disability insurance through your workplace, you may want to consider purchasing an individual policy. To be eligible for individual short-term disability insurance, you will have to go through the medical underwriting process. 

The insurance provider will also need to look over your financial accounts, including your current income. This is done to ensure that the disability insurance policy does not overpay on benefits. This process is more straightforward when dealing with employer-sponsored disability benefit policies because they’re intended to substitute a portion of your income in benefits. 

When looking for a personal policy, search for a credible organization and make sure you read all the fine print. Your state’s department will provide information on the financial stability and complaint history of insurance companies in your region.

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