Here’s a secret: I am not a disability insurance genius. Shocking, I know, but there’s a reason the phrase “personal finance” is part of my formal job title.
I’m disclosing this upfront so it’s clear why, as I’ve reviewed our disability insurance explainers, one question kept wrinkling my brain: Why is there long-term disability insurance and short-term disability insurance?
Why not just have disability insurance and call it a day?
I’m always down to ask a potentially stupid question — for myself or a friend. Plus, a bunch of disability insurance experts are about a ten-second walk away from my desk. So I tapped one of our agents. The short answer? Short-term disability insurance isn’t really a thing.
Why are there two types of disability insurance?
I mean, it is, of course. That’s why there’s a long answer. Let’s start with a recap.
Both long-term disability insurance and short-term disability insurance replace part of your income if you’re too sick or injured to work. But long-term disability is for long-term disabilities. Coverage only kicks in after you’ve been out of work for a certain period time — known formally as the elimination period — but, once it does, you’ll receive benefits for quite some time. Policies vary, but a typical elimination period is 90 days, while the average disability insurance claim lasts close to 35 months.
Short-term disability insurance, conversely, kicks in virtually right away (think zero to 14 days), but doesn’t last very long. Most coverage pays out for three to six months.
A little Insurance 101
Now, there are a great number of things that can keep someone out of work for a few weeks, which put the odds of any short-term disability policyholder filing a claim quite high. Insurers price for risk — it’s how the whole system works — so, unless you get a big enough group to buy in, you’re looking at sky-high premiums.
That’s why people generally get short-term disability insurance through a group plan sponsored by their employer. Private policies exist, but they’re expensive — and usually not worth the cost. Most people are simply better off building an emergency savings fund and purchasing a long-term disability policy with a short elimination period instead. As our disability insurance agent puts it: “You want to use insurance for low frequency/high liability risks.”
Getting disability insurance
That makes having long-term disability insurance a good idea, though figuring out how much coverage you need is tricky. A good rule of thumb is to request the maximum benefit — 60% of your gross monthly income while you're disabled.
Keep in mind, though, that much coverage gets expensive, particularly for older applicants. Plus, if you already have some long-term disability insurance through your employer, you might only need a supplemental policy. You can learn more about finding the best long-term disability insurance policy for you here.
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