Most people think disability is something that happens to other people, but it’s more common than you may think. More than a quarter of today’s 20-year-olds can expect to be out of work for at least a year before they reach retirement age due to a disabling condition.1 And some of the most common reasons for disability claims include pregnancy, mental health issues and cancer2— conditions that might not be top-of-mind when you think about disability. That’s why it’s so important to protect yourself in case an unexpected illness or injury keeps you out of work for an extended period of time. But before you can choose the right protection for a potential disability, you first need to understand the difference between the two primary types of disability insurance: short term and long term.
What does disability insurance do?
Disability insurance is sometimes called “disability income insurance” because it is designed to replace a portion of your income if you are unable to work because of a serious illness or injury. Disability insurance pays benefits directly to you, so you can cover your expenses with no limitation on how the money can be spent. Policies vary, but disability insurance can protect up to 70% of your income for a period anywhere from 3 months to the time you reach retirement age. While every policy is different, the two main differences between long term and short term disability policies are the length of the benefit periods and the level of coverage each type of policy offers.
What’s the difference between short term vs. long term benefit periods?
The biggest difference between short term and long term disability insurance is the period of time you’ll receive benefits if you’re unable to work. This period is called the benefit period. As the name indicates, short term disability insurance is intended to cover you for a short period of time following an illness or injury that keeps you out of work. While policies vary, short term disability insurance typically covers you for a term between 3-6 months. On the other hand, long term disability is intended to provide benefits for a longer period, and benefit periods for long term disability insurance are usually stated in years: 5, 10, 20 or even until you reach retirement age, depending on your plan.
What’s the difference between short term and long term coverage levels?
Both long term and short term disability insurance offer some flexibility in the amount of coverage you can choose, but short term disability usually ensures a greater percentage of your income—sometimes up to 70%. Long term disability typically pays benefits equivalent to 40-70% of your income, but for a longer period. To decide how what level of coverage you would need, calculate your monthly expenses, and consider additional medical bills you may have to pay if seriously sick or injured. Then determine what portion of your salary you would need to cover those necessities if you became disabled.
What’s the elimination period?
While short term disability insurance begins paying benefits within a couple weeks following a qualifying illness or injury, long term disability insurance requires a longer waiting period, called an “elimination period”, before a policyholder begins receiving benefits. The length of the elimination period varies by policy but is often around 90 days. When considering a disability policy, take into account how you will cover your expenses during the elimination period. Do you have an emergency fund to cover your lost income and any medical bills you accrue during this time? If not, you may consider purchasing additional coverage to protect you immediately following a disabling illness or injury.
Which do I need: need short term disability insurance or long term disability insurance?
There are a few things to keep in mind when choosing disability insurance. First of all, do you have an emergency savings fund that could cover your expenses for a few months if you lost your job or were unable to work? If not, short term disability insurance is an essential financial protection, even if you are disabled for only a short period of time. If you have significant emergency savings on hand, though, you may focus on how a long term disability could impact your financial wellbeing and your retirement plans. If you were permanently disabled, could you cover your expenses until retirement? If not, look into long term disability protection.
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Do I need both short term and long term disability insurance?
As you can probably tell, short term and long term disability insurance policies are designed to work 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 income replacement 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 will pay you benefits during the waiting period before your long term disability coverage begins, at which point you’ll transition from one policy to the next to receive benefits. For that reason, it makes sense to have both policies to help ensure an unexpected health problem won’t derail your financial confidence for a few months or for several years.
How do I get disability insurance?
Many employers offer disability insurance to their employees at no cost or at a discounted group rate, so check with your employer to see if a disability insurance policy is available. If your employer doesn’t offer disability insurance, or if you are self-employed, you can also consider looking into an individual disability insurance policy. Even if you do have an employer-sponsored plan available to you, you may wish to purchase additional coverage through an individual policy.
How do I get individual disability insurance?
If you’re self-employed, your employer doesn’t offer disability insurance, or you want to supplement the policy your employers does offer, you can apply for an individual disability policy. Individual disability insurance elimination and benefit periods may differ from group disability insurance, but a financial representative can help you choose the right coverage for your situation. If you’d like some help understanding what type of coverage makes sense for you and applying for a policy, get in touch with a financial representative who can help you make a decision.