Many employers offer short-term and long-term disability insurance as part of their benefits package, where employers pay for all or a portion of the benefit. In addition to employer-sponsored plans, employees can purchase individual supplemental policies or private coverage. When a qualifying injury or illness occurs, a percentage of wages is paid directly to employees to use at their discretion.
A recent USA Today article reports that a quarter of households live paycheck to paycheck, based on a strict definition. About half of Americans believe they are living paycheck to paycheck, based on broader definitions of the term.
“Studies show that a 20-year-old worker has a 1-in-4 chance of developing a disability before reaching full retirement age,” reports the Social Security Administration. This means long-term and short-term disability insurance are essential benefits for an unexpected loss of income, especially for the many employees living paycheck to paycheck.
What Is Disability Insurance?
Disability insurance provides a portion of income when employees are unable to work for a period of time due to injuries or serious illnesses. For temporary illnesses or injuries when they are unable to perform their current jobs, employees use short-term disability. For long-term or permanent ones, employees use long-term disability.
Harrah & Associates Inc. explains the common reasons for short-term and long-term disability claims. Common reasons for long-term disability include cancer, musculoskeletal disorders, and cardiovascular problems. For short-term disability, common reasons include pregnancy, short-term musculoskeletal disorders, digestive problems, and mental health issues. While parental leave typically covers a longer period, short-term disability may provide benefits for six to eight weeks after delivery. Recovering from car accidents, medical procedures, and surgeries is an additional reason for short-term disability.
A report from the Employee Benefit Research Institute states that “about four in 10 workers have access to long-term and short-term disability insurance.” New York Life reports that employees pay 1% to 4% of their annual income for disability insurance. Whether or not disability benefits need to be reported to the IRS as taxable income depends on multiple factors, including who paid for the insurance and if pre-tax or after-tax funds were used to pay for it.
Key Terms Defined
Three key terms in disability insurance are elimination periods, probation periods, and coverage levels. These vary significantly depending on the cost and specifics of the policy.
Elimination Period
An elimination period is the waiting period before your coverage kicks in. It typically starts from the date of an injury or illness, not the date you file a claim. According to AFLAC, “The elimination period you choose will directly impact the premiums you pay for disability insurance.” Costs are lower with longer elimination periods and higher with shorter elimination periods. Elimination periods can range from 30 days to 720 days.
Probation Period
A probation period is different than an elimination period. When you receive a new policy, the probation period is the amount of time you need to wait before you are eligible to make a claim and have benefits paid. It can vary from 15 to 180 days or longer. The goal is to prevent claims for preexisting conditions.
Coverage Levels
Disability insurance policies vary in the amount and duration of coverage levels, which is the percentage of lost wages that will be covered. Policygenius writes, “Usually disability insurance will cover up to 60% of your pre-tax income, which typically comes close to your take-home pay.” If you expect a higher income later, you may have the option to over-insure, meaning getting more insurance than your income.
Disability Insurance vs. Worker’s Compensation Coverage and SSDI
If injuries happen while at work, then workers’ compensation often provides financial benefits. Disability insurance applies regardless of where the injury happens. It is possible to receive payments at the same time from both workers’ compensation and disability insurance, but the amount of each may be reduced.
The government provides Social Security Disability Insurance (SSDI), which makes monthly payments to eligible people with permanent disabilities who are unable to work in any field. It is based on past earnings and takes an extensive work history to become eligible for SSDI. Guardian Life describes the in-depth details of SSDI, including the five-month elimination period, the stringent application process requiring extensive documentation, and the high rejection rate.
On the other hand, long-term disability is easier to qualify for and more customizable, with potentially higher benefits than SSDI. Individuals can receive both long-term disability and SSDI simultaneously, but the long-term disability payment will be reduced.
Short-Term Disability Insurance
Short-term disability insurance covers 40% to 70% of weekly wages for a brief time during a temporary serious illness or injury that prevents employees from performing their current job. The length can vary from a few weeks to a full year, but the term is often three to six months or in terms of weeks (13, 26, or 52). It is typically paid weekly, and there may be a monthly maximum. The goal is to allow employees to recover while receiving some income and then help them return to work. If employees quit while receiving disability payments, they may lose coverage or even be required to repay it.
According to ADP, the following are excluded from short-term disability coverage: preexisting conditions, which may include pregnancy, self-inflicted injuries, illegal drug use, cosmetic procedures, and injuries that occur when committing a crime or participating in a riot or protest. While mental health conditions may qualify for short-term disability coverage, the claim process can be harder.
Long-Term Disability Insurance
Long-term disability covers 50% to 70% of an employee’s gross monthly income for an extended period. It typically covers 60% of income, is paid monthly, and does not cover preexisting conditions. It usually kicks in after short-term disability benefits are used. The length is in terms of years and varies depending on the policy. It could last from two years to retirement.
Two different definitions can be used when qualifying for long-term disability: own occupation or any occupation. They can be applied at different periods within the same policy. “With any occupation, you can receive benefits if you are unable to work in any occupation you are or could become qualified for, taking into account your training, education, and experience,” describes MetLife. By contrast, your own occupation applies to being unable to perform work in your own occupation, either in your current job or a similar one. Own occupation is often used initially, followed by any occupation after two years.
Federal and State Requirements
Most states do not mandate short-term or long-term disability statutory benefits, but many employers offer them as voluntary benefits. However, employers in the following states are mandated by state laws to provide short-term disability and adhere to specific plan requirements: California, Hawaii, Rhode Island, New Jersey, and New York. In some states, short-term disability is called temporary disability insurance (TDI).
While the FMLA provides unpaid leave and job protection, short-term disability provides pay. In 12 states, employers are required to provide paid family and medical leave: California, Colorado, Connecticut, Delaware, Hawaii, Maryland, Massachusetts, New Jersey, New York, Oregon, Rhode Island, and Washington.
The Differences Between Short-Term and Long-Term Disability Insurance
The length of coverage and waiting period are the biggest differences between short-term and long-term disability. Short-term disability provides temporary income for up to six months or one year, while long-term disability provides coverage in terms of years for long-term or permanent disabilities.
The waiting period to qualify for short-term disability is much shorter than for long-term disability. Short-term disability often begins after a 14-day waiting period, while long-term disability begins after 90 days or longer, depending on the coverage level.
The two also vary in terms of the duration and severity of injuries and illnesses. While short-term disability is based exclusively on being unable to perform your current job for temporary disabilities, some definitions of long-term disability are based on being unable to perform any occupation.
When employers voluntarily offer short-term and long-term disability insurance, employees value having financial benefits for unforeseen injuries or illnesses. As part of a total compensation package, offering these benefits helps employees feel less stressed and more supported, which has a positive impact on morale and retention.
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