While most people will need long-term disability insurance, short-term insurance can help protect you before longer coverage kicks in.
Most people encounter short-term disability insurance, or STDI, for the first time when they’re signing up for employee benefits. However, hunched over your laptop hurriedly going through your contracts and benefits isn’t really the best environment for learning about disability insurance. STDI can be complicated to shop for and purchase. But it doesn't have to be if you know the right questions to ask.
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Why talk about short-term disability insurance at all? You’re more likely to experience a disability than you might think – according to the Council for Disability Awareness, 1 in 4 workers will experience a period of disability before they retire. On top of that, 46% of Americans wouldn’t be able to cover a $400 emergency expense without resorting to credit card debt or a family loan. If you were unable to work due to a short medical emergency, how would you pay for it?
Short-term disability insurance is an insurance product that replaces your income for a short period of time in the event that you experience a disability. The benefit period usually lasts 3 to 6 months. Let’s break that definition down a little:
A disability is any medical condition that stops you from working. It’s a common misconception that disabilities only occur because of workplace accidents; in fact, most disabilities are caused by chronic conditions like back injuries, cancer, and heart disease. Depending on your employer, pregnancy may also be categorized as a disability, and you may need to use a disability insurance policy to provide income while you’re on leave from work.
STDI may not cover you for the entire duration of your disability. Depending on your policy, STDI generally replaces your income between three months and six months. (As we’ll get into later, STDI complements long-term disability insurance nicely.) STDI plans typically cover up to 80% of your gross income.
STDI may cost anywhere between zero dollars and way too much, depending on where you get it from. Your monthly bill, referred to as your monthly premiums, may be entirely covered by your employer. Some employers may ask that you contribute a small amount in order to participate in the plan. If you purchase your STDI through a private insurer, it could cost anywhere between $50 and $150 or more, depending on how much coverage you need and for how long. STDI typically costs as much as long-term disability, despite the fact that STDI offers a shorter coverage period.
Long-term disability insurance (or LTD insurance) has the same purpose as short-term disability insurance. The difference is when it kicks in and for how long. Long-term disability insurance only kicks in after an elimination period (a.k.a. a waiting period). The typical elimination period is 90 days, but can be as long as 180 or 360 days depending on your policy.
As you can probably already tell, short-term disability and long-term disability are designed to be used in tandem. While long-term disability doesn’t kick in for three to six months, it can last for years. The average long-term disability claim lasts for 35 months.
While some employers offer long-term disability as well as short-term disability, it may make more sense to buy a private long-term disability policy that sticks with you from job to job. Why? Three big reasons:
LTD insurance is cheapest when you’re young (like life insurance)
Not all employers will offer LTD insurance
It can be prohibitively expensive to convert your employer’s LTD policy into a private LTD policy
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The best alternative to short-term disability insurance is to self-insure with an emergency savings fund. Most financial experts suggest that you have an emergency fund of anywhere between three and six months salary anyway, which, combined with an LTD policy, can easily cover you during a disability.
However, if you don’t have that emergency fund, or are in the process of building up your fund, then an emergency fund may not make sense as an alternative to STDI. If you receive short-term disability benefits from an employer, and they pay 100% of your premiums or the cost is relatively low, it may make sense to have an emergency fund plus and STDI policy. That way, your emergency fund can be saved for other purposes, like home repairs or medical emergencies.
The federal government does not supply any kind of coverage for short-term disabilities. Social Security Disability Insurance, or SSDI, is designed to cover long-term disabilities. Additionally, acceptance rates for SSDI are low, and if you have the means to cover yourself with private insurance, you should.
Insurance companies sell short-term disability insurance policies, but most people get it through their employer. Talk to your human resources department for more information on whether or not your employer offers a short-term disability policy.
If your employer does not offer a short-term disability policy, you can buy an individual policy to cover part of your risk until your long-term disability policy kicks in through Policygenius partner LifePreserve.
In general, we can only recommend short-term disability insurance if offered by your employer either for free or at a low cost. Private short-term disability insurance is most likely not worth your money; it’s often just as expensive as long-term disability insurance despite having a shorter coverage period. That money would be better spent paying into an emergency fund, as short-term disabilities are much easier to self-insure than long-term disabilities.
If you want disability coverage, you’re better off purchasing long-term disability coverage. Long-term disabilities are much harder to self-insure, and private long-term disability coverage can be a better choice than buying coverage through an employer because it is cheaper in the long run and you can take it with you from job to job.
Colin Lalley is the Associate Director of SEO Content at Policygenius in New York City. His writing on insurance and personal finance has appeared on Betterment, Inc, Credit Sesame, and the Council for Disability Awareness.
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