Short-term and long-term disability insurance have many similarities but a few key differences in how they protect your income.
Disability insurance is a must-have part of your financial safety net, as important as life insurance or an emergency fund. Even though it protects your income when you’re unable to work due to illness or injury, some people would rather rely on workers’ compensation or government benefits programs for protection. But the truth is that workers’ compensation is limited to work-related injuries and Social Security disability insurance (SSDI) is hard to qualify for. In the end, it comes down to long-term disability vs short-term disability for income protection.
For many people, long-term disability insurance is a better option, because it lasts longer and is more cost-effective than short-term insurance. Short-term disability insurance can provide complementary coverage but won’t be enough for most people on its own. To understand the differences between short- and long-term disability insurance, you need to know:
|Short-term disability insurance||Long-term disability insurance|
|Benefit period||3-6 months||2, 5, 10 years, or until retirement|
|Elimination period||Less than 14 days||30-720 days; Recommended 90 days|
|Coverage amount||Up to 80% gross monthly income||Up to 60% gross monthly income|
|Average cost||1-3% of annual salary||1-3% of annual salary|
|Where to buy||Typically employer-sponsored||Private policies available from carriers; employer-sponsored|
The amount of time someone can receive disability benefits is called the benefit period, and a natural place to start comparing short- and long-term disability policies is how long they last. Going by their names it’s obvious that one lasts longer than the other, but what exactly do “short-term” and “long-term” mean?
Short-term disability benefits typically last between three to six months. Long-term benefits are measured in years; you can apply for a benefit period that lasts two, five, or 10 years, or until retirement age.
Broadly speaking, the shorter the benefit period, the cheaper the disability policy. But keep in mind that the average disability lasts around three years; one of the problems with short-term disability insurance is that the coverage isn’t adequate for most people. At best, short-term disability insurance should supplement long-term disability insurance, the former providing income protection until the latter kicks in.
Before asking how long benefits last, you need to know how long it is before they even begin — known as the elimination period, or waiting period.
The elimination period for short-term disability insurance is usually under 14 days. Long-term policy elimination periods range from 30 days to two years, but the most common is 90 days. The longer the elimination period — the longer you can go without accessing your policy benefits — the cheaper the policy.
As mentioned previously, this is a good example of how short-term disability insurance can complement long-term insurance. Between short-term insurance and liquid savings, you can increase the elimination period of your long-term policy and lower the cost significantly.
Learn more about disability insurance elimination periods.
You won’t match 100% of your salary with either short-term or long-term disability insurance. That would be prohibitively expensive. But you can come close. Short-term disability will usually provide around 80% income replacement, while long-term benefits are usually around 60% income replacement.
However, keep in mind that this is compared to your actual take-home pay. Disability benefits are not taxed in most cases, so your benefits will be pretty close to what you were bringing home.
Lowering the disability coverage amount can also lower the cost of the policy, but be realistic about how much replacement income you need. You may save money on your premiums with a lesser benefit amount, but if you skimp on coverage you run the risk of not having enough money when you’re unable to work.
Besides the benefit period, elimination period, and coverage amount, there are a number of factors that affect the cost of a disability policy, including:
In general, though, you can expect to pay 1% to 3% of your annual salary for a disability policy. However, consider how much more protection you get with long-term disability insurance; it lasts far longer than short-term insurance, and for that reason it’s much more cost-effective.
That’s also why, as we’ll discuss below, most people have subsidized short-term disability policies through their employer rather than buying a private policy. It can be expensive to pay for a short- and long-term policy, and getting an employer-sponsored short-term policy is the most financially responsible course of action.
Learn more about disability insurance costs.
Long-term disability and short-term disability insurance are both popular employee benefits. Employer-sponsored disability insurance is often subsidized and if you’re able to get either for free through your employer, it’s worth it. For many people this is the only way to get short-term disability; few carriers offer private short-term insurance and, as mentioned, it’s not the most cost-effective option.
On the other hand, you shouldn’t have any problem finding an insurance company to buy long-term disability insurance from, and if you can only afford one, it’s usually the better option. Be sure to find a company that has good ratings from places like the Better Business Bureau and A.M. Best, offers competitive quotes, and accommodates your particular profession. Policygenius can help you compare disability plans from a number of carriers to find one that works for you.
Important: No matter what kind of disability insurance policy you get from your employer, it will be tied to your employment. If you leave your job or are fired, you will lose coverage or be given the option to pay for it on your own, usually at a high cost. Employer benefits are great, but make sure you’re able to protect yourself on your own as well.
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. Colin has a degree in English from the University of North Carolina at Chapel Hill.