Your income is one of your biggest assets, and losing it can quickly take a toll on your financial well-being.
According to a Lifehappens.org survey, two-thirds of working Americans could not go six months before financial difficulties would set in, while 14 percent would be negatively impacted immediately.
Disability insurance can offer an important safety net because it pays you a percentage of your salary if an illness or injury ever prevents you from working.
There are two main types of disability insurance–short term disability insurance, often offered through employers, and long term disability insurance, which may need to be purchased separately.
As their names imply, short term disability insurance lasts for a shorter period of time than long term disability insurance.
But there are other key differences between short term and long term disability (or STDI vs. LTDI), including how quickly coverage kicks in, as well as costs.
Here, we’ll take a close look at both types of disability insurance to help you determine what type of coverage might work best for you.
What is Short Term Disability Insurance?
Short term disability insurance (also called short term disability income insurance, or STDI) is a type of insurance that will provide supplemental income in the event of an injury or illness that may keep you from working.
The amount of time you can receive benefits (or supplemental income), is known as the benefit period.
Short term disability policies typically have a benefit period of three to six months, though some may even last up to a year. The shorter the benefit period, the less you or your employer will pay in premiums for coverage.
Benefits vary by plan, but these policies typically pay anywhere between 50 to 70 percent of your pre-disability salary during that time.
Disability policies also have specific start dates when your payments begin. This waiting period is typically referred to as the elimination period.
Short-term disability policies often have an elimination period of 14 days (though this can range from 7 to 30 days). That means payments would start 14 days after your disability occurs (or the last day you were able to work).
Some employers have policies that require employees to take all of their sick days or, if the injury happened on the job, workers’ compensation benefits, before short-term disability is paid.
Employers may also require you to show proof from a doctor that you have undergone an illness or injury that prohibits you from working.
They also may require you to see an approved healthcare provider for regular updates on your condition while you are out of work. Many of the rules for short-term disability coverage are determined by your state.
How Do I Purchase Short Term Disability Insurance?
Most commonly, people get disability insurance through their employer. Companies often offer this benefit for no or very low cost.
In some states it’s mandatory for employers to offer this and you may pay a small fee for this from payroll deductions. Your employer is generally the easiest and most cost-efficient way to get short-term disability insurance.
If you are self-employed, or your employer doesn’t offer this benefit, you may be able to purchase short term disability insurance from a private insurer. The hitch is that few carriers offer private short-term insurance and, if they do, it tends to be costly.
You could pay anywhere from one to three percent of your annual salary for a benefit that may only last a few weeks or months.
You may find it makes more sense to invest in long term disability insurance.
What is Long Term Disability Insurance?
Long-term disability insurance (also known as long term disability income insurance or LTDI) is an insurance policy that protects employees from loss of income in the event that they are unable to work due to an illness, injury, or accident for a long period of time.
The benefit period (or the amount of time you’ll receive benefits) for long term disability insurance is often a choice of five, 10, or 20 years, or even until you reach retirement age, depending on the plan. In general, the longer the benefit period, the more you’ll pay in premiums.
Long-term disability insurance typically pays about 50 to 60 percent of your pre-disability salary, depending on the policy. In most cases, the higher that number, the higher the premium.
Some policies will also make up the gap in your income if you must return to work at a lower wage job because of an illness or injury. That coverage may also come with a higher premium.
The elimination period (the amount of time you must wait until benefits begin) for long term disability insurance usually includes several options, including 30, 60, 90, 180 days, or a full year.
In general, the longer the elimination period, the less you will pay in premiums. The most common elimination period is 90 days.
But if you can’t afford a policy with that elimination period, you may be able to reduce your premium costs by electing a longer period of time until benefits start.
You may want to keep in mind, however, that a longer elimination period means that you would have to go without income for a longer period of time, and might need to have savings or other resources to cover living expenses.
Each long-term disability insurance policy has different conditions for payout, diseases, or pre-existing conditions that may be excluded, and various other conditions that make the policy more or less useful to an employee.
Some policies, for example, will pay disability benefits if the employee is unable to work in his or her current profession. Others expect that the employee will take any job that the employee is capable of doing—that’s a big difference and could be consequential to the employee.
How Do I Purchase Long Term Disability Insurance?
Some employers offer subsidized long term disability insurance policies to employees at discounted group rates.
If your employer doesn’t offer this, you may be able to purchase long term disability insurance from a private insurer. Unlike short term disability insurance, these policies are widely available.
Also unlike short term disability insurance, private insurers typically offer individuals a range of long term disability policies to choose from.
Long term disability insurance is also sometimes available for purchase through professional associations, potentially at discounted group rates.
The cost of long term disability insurance can vary depending on the benefit period, the elimination period, your age, health, occupation, along with other factors. In general, these policies tend to run between one and three percent of your annual salary.
This is about the same as if you purchased a short-term disability policy outside of your employer.
If you were to use the insurance, however, you would benefit for years, not months, making long term disability insurance more cost-efficient than short term disability insurance.
Do I Need Short Term Disability if I Have Long Term Disability?
When possible, it can be beneficial to pair short term and long term disability insurance together.
Short term disability is intended to cover you immediately following a serious illness or injury, and long term disability insurance is intended to maintain supplemental income if your condition keeps you out of work past the end of your short term disability benefit period, even to retirement, depending on your plan.
If you have both short term and long term disability policies in place, short term disability can pay you benefits during the elimination or waiting period before your long term disability coverage begins, at which point you would transition from one policy to the next to receive benefits.
The combination can help you achieve the smallest possible income gap should you need to use disability insurance.
The best combination for you will depend on what options your employer offers, how much money you have saved in an emergency fund, and what you may be able to afford to purchase on your own.
Disability income insurance offers an important way to protect your livelihood should you find you can no longer work at the same capacity you were expecting.
The primary distinction between short and long term disability insurance is the coverage period.
Short term policies generally cover just the first few months you’re unable to work. Long-term policies, on the other hand, can last for years—decades even—after you’re unable to work and may see you through retirement.
Because long term disability insurance benefits don’t start right away, it can be beneficial to pair long term disability benefits with short term disability insurance.
If your employer does not offer short-term disability coverage free or for a very low fee, another good option is to put together your own short term disability coverage by saving three to six months of expenses in an emergency fund.
That way, If you get sick or injured and have to take time off work for a few months, your savings can fill in the gaps until you get back on your feet.
If your emergency fund is currently small (or nonexistent), you may want to consider signing up for SoFi Money®. SoFi Money is a cash management account that allows you to earn, spend, and save–all in one place.
With SoFi Money’s special “vaults” feature, you can easily set up a separate emergency fund, and also sign up for recurring deposits to help build your back-up fund faster.
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