Short Term vs. Long Term Disability

Posted on Legal

Introduction: Short-Term vs. Long-Term Disability

The purpose of disability insurance is to replace an individual’s income in the event that they become physically unable to work. While most people may be prepared for the medical costs of severe injury or sickness by health insurance, without disability insurance they are unprepared for the loss of wages that accompany a catastrophic injury that would render them unable to work. According to America’s Health Insurance Plans, one-third of working adults say their savings would run out in three months or less if their family’s primary wage earner lost his or her income due to a disability.Generally, if you count on the earnings from your job to pay the rent and buy food, you probably need disability coverage.

The two types of disability insurance are short-term and long-term disability. Short-term disability benefits generally cover a percentage of lost salary should injury or illness keep an individual from working for more than a few days up to six months. A long-term disability insurance plan will provide financial benefits in the event that an accident causes an injury or an illness that will prevent the beneficiary from working for longer than six months. Many experts believe that long-term disability insurance is the most important insurance a person can purchase since advances in medical care have made some diseases and injuries disabling rather than deadly, meaning that although these conditions may no longer be fatal, the resulting time off work can be lengthy.

Definition & Restrictions

Those who will miss work for six months or less are most likely looking at short-term disability. Payments generally are triggered when any available sick leave is exhausted. Early on, short-term disability insurance often replaces 100% of the beneficiary’s salary, but payments are often reduced to 60% or less after a few weeks. Duration of benefits varies by policy, but six months is standard.

Long-term policies usually pick up where short-term disability policies leave off, and some last only five or 10 years, but ideally the most desirable coverage extends to age 65. Long-term disability insurance can be purchased to replace 50-70% of your salary. Some employers allow their employees to purchase extra insurance from the same company, sometimes raising the total to 80%. However, some policies have monthly maximum payouts, which may reduce the actual percentage of salary the policy owner receives. The salary is set at the time the policy is purchased, and the policy owner will likely want to increase the value of the plan as his compensation increases.

Policy Cost vs. Payout Time

Disability premiums are based on the insured’s age, sex, occupation, and the amount of potential lost income. Most of the time, short-term disability insurance is employer paid, although an employer may require that their employees pay for it, or share in the cost. While long-term disability insurance used to be paid for by primarily by employers, the current trend is to shift more of the costs to the employee.

Short-term disability coverage usually begins one to 14 days after the employee suffers a condition that renders them unable to work. If an illness keeps an employee out of work for a more extended period of time, they are usually required to use sick days before short-term disability payments will begin. Short-term disability insurance will typically pay for a disability that lasts six months or less, and the waiting period is relatively short, with payments from the insurance company sometimes beginning in just a few days.

Long-term disability policies vary in the length of payout: some policies will only pay out for five or 10 years, while others will pay out until age 65. Policies also vary regarding their definition of disability, especially in categories such as mental illness and back injuries, and most have exclusionary criteria for pre-existing medical conditions and injuries from dangerous activities. The standard waiting period for long-term disability payments is 90 days.

Age & Personal Health Factors

Age is a major factor in the cost of disability insurance, and can even determine a person’s ability to buy a policy. The older an individual is when they purchase disability insurance, the more they can expect to pay. The cap on most disability insurance policies is 65 years of age, although a few cap at 67. This means that once a person reaches this age group, they will be unable to purchase disability insurance.

Another factor that determines the cost of a disability insurance policy is the insured’s general health. While a disability insurance policy can be purchased without a physical, the premium may cost up to three times more than a policy covering a person who successfully passes a physical. Even an individual with some minor health issues who chooses a policy that requires a physical will usually pay far less than they would if they bought a policy without the physical requirement.

Those with certain pre-existing medical conditions may not be able to purchase a disability insurance policy at all. For example, diabetics, Alzheimer’s patients, and individuals with serious heart conditions may either be unable to purchase disability insurance or may have to have that condition excluded from their disability policy, depending on the medical condition and the insurance company’s policy.

State & Regional Factors

Most employers are required to provide workers’ compensation benefits that replace a portion of a person’s income if they are unable to work, temporarily, due to an accident that occurs in the workplace or while an employee is in the course and scope of their employment. These benefits vary according to the state in which you live. Only five states, California, Hawaii, New Jersey, New York, and Rhode Island, provide or require employers to provide temporary disability benefits to their employees. Most disability programs will pay temporary benefits until the employee is able to return to work. If they are not able to return to work, the employee may be eligible for permanent disability benefits, which are available through their state’s workers’ compensation program and the Social Security Administration.

If an employee is injured on the job while employed by a private company or by a state or local government agency, they should contact their state workers’ compensation board. If a person is a federal employee, the Federal Employees’ Compensation Act (FECA), administered by the Office of Workers’ Compensation Programs (OWCP), provides compensation benefits to federal employees for temporary disability due to employment-related injury or disease.

Workers’ Compensation Insurance usually covers both short and long term disabling illnesses and injuries that happen to an employee while at work. To be considered disabled under Social Security law, a person typically cannot be working or even be able to work. If they are working, their earnings must be less than a specific limit set each year by Social Security. The individual must also have had, or be expected to have, a severe medical condition for at least one year. If their medical condition is one that is listed on Social Security’s “list of impairments,” or if it prevents the employee from doing the work they did before, or any other work, they may be eligible for disability benefits.

Key Differences (Employers)

Most states do not require employers to carry disability insurance on their employees. Many employers choose to offer disability insurance to their employees, but the plans vary greatly and some may not provide adequate coverage. Most employer-paid long-term disability plans cover 50-70% of monthly salary. Employers are free to choose how much coverage to provide for their employees, and usually stipulate certain terms, such as how many hours per week an employee must work to be covered (usually at least 30) and the specific length of time an employee needs to have worked for them before they are eligible for disability coverage.

If an employee is injured on the job, he can also apply for long-term disability benefits through his state workers’ compensation board.  The Social Security Administration will also pay long-term disability benefits, provided the individual is determined to be disabled according to their criteria. Social Security does not offer temporary disability benefits.

Key Differences (Employees)

Individual disability coverage is generally much more expensive than employer disability coverage; however, an employee should review any coverage provided by their employer and consider purchasing individual coverage if they determine that the policy is insufficient.

Employees can expect to pay from one percent to three percent of their annual gross income for a quality disability policy. To save money on disability insurance premiums, an individual should get coverage for the amount they need to meet their regular expenses rather than to replace their total income. If an occupation is considered to be dangerous, the disability premiums will be higher than those for a lower-risk occupation. For example, the disability premiums for an accountant working in an office would probably cost much less than those for a construction worker.

Disability premiums are also based on the specifics of the policy and the additional benefits that may be added. Some stipulations to consider that may change the level of premiums of a disability policy include:

•    Does the policy consider a person disabled if they cannot work in any occupation, or if they cannot work in their current occupation?
•    Is the policy non-cancelable and guaranteed renewable, or can the insurance company raise the premium or cancel your policy if they choose to do so?
•    Can optional benefits be added to the policy, such as inflation protection, residual benefits and the ability to increase the benefits of the policy at a later date with no medical exam?

With short-term disability insurance, coverage will start on the first day of disability and typically includes pregnancy, illness, or injury caused by an accident. Short-term benefits will be payable as long as the insured is under the supervision of a certified health professional. If the beneficiary exceeds 180 days and is still unable to work, long- term disability insurance may apply.

Usually, the stipulation of long-term disability insurance is that the individual is covered financially up to the time that he or she is able to return to work, or until they reach retirement age. If the employer pays disability insurance premiums the employees pay taxes on the coverage, but if the premiums are paid through a Section125 cafeteria plan they do not. Regarding payouts, any disability payouts from an employer’s policy are subject to taxes, while payouts from individual policies or are not.

Conclusion

While a person may consider their most valuable asset to be material possessions like their house, car, or retirement account, in reality it is their ability to earn a living. For this reason, disability insurance is as important as life insurance, since it can replace a person’s income on either a short-term or long-term basis, should they be left unable to work because of illness or injury.

Short-term disability insurance covers illnesses and injuries that keep an employee out of work for as little as one day or as long as six months, and usually do not begin to pay until the individual’s sick leave has been exhausted. Short-term disability insurance may seem like the best option for employees in less dangerous occupations, although the National Institute on Disability and Rehabilitation Research reports that only 13% of disabilities actually stem from injury; the vast majority of disabilities are the result of illness.

While some employers choose to fund a short-term disability plan, many more offer a long-term disability plan funded through a third party administrator. The United States Census Bureau estimates that an employee has a one in five chance of becoming disabled. Long term disability insurance can help ensure that an employee will still receive at least a percentage of their income if they cannot work due to sickness or a disabling injury, an important protection for all employees, especially those in dangerous jobs, although anyone who works to earn their living probably needs to consider it.