Disability insurance protects your income when you can’t work due to illness or injury. Many people will try to rely on workers’ compensation or government benefits programs for protection, but the reality is that workers’ compensation is limited to work-related injuries and Social Security disability insurance (SSDI) is difficult to qualify for. The best way to protect your income is with a disability insurance policy and there are 2 types – short-term and long-term.

How Long Do Benefits Last?

The amount of time you can receive disability benefits is called the benefit period. Short-term disability insurance is meant to cover you for a short period of time following an illness or injury that keeps you out of work. It typically provides benefits for 3-6 months.

Long-term disability insurance is meant to provide benefits for a longer period like 5, 10, 20 years, or even until you reach retirement age, depending on your policy.

The average long-term disability claim is about 3 years, so a problem with only having short-term disability insurance is that the coverage isn’t enough for a lot of people. A short-term policy can be a good supplement to a long-term policy by paying you benefits during the waiting period before your long-term coverage begins.

Do I Need Short-Term or Long-Term Disability Insurance?

Do you have an emergency savings fund that could cover your expenses for a few months if you lost your job or couldn’t work? If not, short- term disability insurance is really important. If you have significant emergency savings, you could focus on how a long term disability could impact your finances and your retirement plans. If you were permanently disabled, could you cover your expenses until retirement? If not, look into long term disability protection.

When Do Disability Benefits Start?

The waiting period (also known as the elimination period) for short-term disability insurance is usually under 14 days. Long-term policy elimination periods range from 30 days to 2 years, but the most common is 90 days. The longer your elimination period is means the less expensive your policy will be, but it also means you have to wait longer to receive your benefits.

How Much Coverage Do Disability Benefits Provide?

The insurance company won’t pay you 100% of your income, but it will replace a good chunk of it. Short-term coverage replaces about 80% of your gross monthly income while long-term coverage typically replaces about 60%. If you have an individual disability policy, benefits are NOT usually taxed, so your benefits should be fairly close to your take home pay.

Where Can I Buy Disability Insurance?

Employer-sponsored short-term disability insurance is fairly common. You may be able to get it for free or pay just a small amount in premiums from your paycheck. For many people, this is the only way they can get short-term disability. If you were to try and get short- term coverage outside of work, there aren’t many insurance companies who offer the coverage and it’s not usually cost-effective. It’s important to know that no matter what kind of disability policy you get from your employer, generally you can’t take it with you. If you leave your job or get fired, you’ll lose coverage or possibly be offered to pay for it on your own, but it will likely be at a very high cost.

For long-term disability insurance, there are many companies to choose from. If you can afford it, it’s a better option than getting it through your employer because the benefits will be tax free, you’re guaranteed benefits no matter where you work, and it’s more customizable. If you work with an independent agent, we can compare disability plans from different insurance companies to find one that works for you.

Taxation of Benefits

In general, if your employer pays for your coverage, the benefits will be taxed. However, if you buy your own policy with after tax dollars, your benefits are tax free.

The Bottom Line

There are significant differences between short and long term disability insurance policies. Talk with an independent agent who can assess your situation, provide different options, and design a meaningful policy.