What Is Long-Term and Short-Term Disability Insurance?

By Chris Kolmar - Nov. 10, 2020
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Short-term and long-term disability insurance are things that most employees want, but they’re often things that people don’t understand. We’re here to shed some light on these different types of insurance. You’ll learn why they’re important. What the difference is. Why you want them. And when you can use them.

You’ll also learn why it’s important to ask a prospective employer what their disability benefits are. It could mean the difference between you choosing a good job that will support you in the future or making a bad choice.

What is Long-Term Disability Insurance?

Long term disability insurance is basically explained in the name, it’s insurance that kicks in to pay you a portion of your income if you have a long-term disability. Okay, that part is pretty easy to understand, but it certainly doesn’t answer all of your questions.

When does long-term disability insurance kick in and what determines if an injury is long term. In fact, what injuries are even covered. And that’s where it gets a little more confusing.

Long-term disability insurance kicks in after short-term insurance has expired. This requires a deeper dive into short-term insurance. For the time being, it’s key to note that if you have a qualifying injury or illness, short term disability insurance pays first, then it switches to long-term.

Now that we know long-term starts after the short-term disability insurance runs out, what’s the timeframe. That all depends on your policies. Typically, short-term insurance lasts anywhere from 3-6 months, after that, long-term will start. Some policies may also have a waiting period, that can extend the time before you get your long-term benefits even longer.

If you’re wondering how long your long-term disability insurance will pay, that again depends on your policy. Some run for a couple years, some run a full 10 years, some even last until retirement.

One of the most confusing questions is about what long-term disability insurance covers. According to the Council for Disability Awareness, some of the most common “disabilities” that are covered include:

  • Musculoskeletal/connective tissue issues

  • Cancer

  • Cardiovascular/circulatory related illnesses

  • Nervous system related health problems

  • Injuries and accidents (this can include car accidents)

  • Maternity related concerns

  • Mental disorders/psychiatric concerns

What won’t be covered by long-term disability is an injury or illness that’s caused by your work and that can be covered by worker’s compensation insurance. Worker’s comp takes priority in the insurance lineup and they’ll have to pay for work related problems.

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You may discover that the insurance policy you have has some exclusions, pre-existing conditions, and other restrictions. This is common and it can vary by policy. That’s why it’s important to learn about your specific policy. Even if you’ve had a policy in the past, they’re all different and it’s worth your time to figure out the basics of yours.

While each policy varies, the real goal of a long-term disability policy is to provide you a percentage of your income in the event that you can’t work for an extended period of time.

The Shortfall in Long Term Disability Coverage

While long-term disability insurance is great, there are some shortfalls. The first is that many people don’t have it. According to the Bureau of Labor and Statistics, in 2018 roughly 34% of private industry employees had access to long-term disability plans and state and local government fared slightly better with 38%. While that isn’t a downfall of the insurance itself, it is a downfall of employers.

Another shortfall of long-term disability insurance is that it only covers a portion of your insurance. Typically, it’s around 60%. That’s often not enough for the average employee to pay all of their bills. The concern is that too much payout and the employee is never incentivized to get better and come back to work. If you feel 60% isn’t enough, there are options where you can take out an additional insurance policy. Or you can start a stringent savings plan of your own.

There is another shortcoming to long-term disability insurance – it’s taxes. According to the IRS, you must report any income you receive from your disability insurance plan. There are several things to that may affect the amount you have to pay but it is considered taxable income.

Personal Long-Term Disability Insurance

As you can see from the downfalls listed above, the biggest issues with long-term disability insurance is that not everyone has it and it offers some coverage, but usually not enough. The good news is that you can buy your own long-term disability insurance. It’s called either personal or individual long-term disability insurance and can be purchased from any major insurance provider.

Creating an individual plan when your work doesn’t provide one is a great idea. In fact, it can be very beneficial because it stays with you, even if you’re between jobs or you transfer to a new one.

You can even take out an individual plan if your employer does provide you with long term coverage. This additional plan can be tailored to give you a higher percent of your income, should you be unable to work for a long time. You can stack individual plans if you’d like for more coverage. An insurance agent can tell you more about what’s available for your individual situation and help you set up the personal plan that works for you.

One big downside to personal plans over employer-based ones, is the expense. These are not cheap insurance plans. In fact, the cost can be prohibitive to people who live paycheck to paycheck, and these arguably are the people who need this type of coverage most. This is why looking for an employer that provides a long-term disability plan is important when you’re trying to find a new job.

There is a compromise, or a middle-ground of sorts. Some companies won’t offer long-term disability insurance, but they will establish a relationship with a provider which allows you to purchase the insurance yourself for a greatly reduced price.

Why Employers Should Offer Long-Term Disability Insurance for Employees

If you’re an employee, then you really want to look for employers that offer long-term disability insurance. It’s one of those benefits of the job that can be really worthwhile.

Think you won’t need it – think again. According to the Social Security Administration, one in four people who are 20 years old right now will be disabled before they reach the retirement age of 67. That’s a whopping 25%. Now, it seems even more important that your employer add this to their list of benefits.

Employers should think about adding disability insurance because it makes them more attractive to potential employees. It can also help them keep the employees they have and bring back employees after they’ve suffered a debilitating event. It’s a win/win for both parties and gives a company a competitive edge over others when recruiting top talent.

Which Type of Disability Insurance Is Right for You?

So, what type of disability insurance is right for you and your situation? There are a few common types, but the one you choose has a lot to do with your employer and what’s available to you.

Employer-Provided Plans

This is what you want, as an employee, if you can get it. This plan doesn’t cost you anything and it gives you some basic coverage if you find yourself in this type of situation.

Employee Paid Plans

This is the type of plan where your employer has a relationship with the insurance company so you can get a pretty substantial discount if you opt into this plan. Of course, it would be better if your employer paid the premiums, but this is typically a good deal and you get some flexibility in the plan that will let you add or subtract coverage.

Shared Cost Plans

If you contribute to the premium and your employer does, then this is a shared cost premium.

Group Coverage

Further dividing up those options, you’ll sometimes see that your employer provides a group plan. This means that the employer provides the insurance, and you have the option of adding supplemental insurance. This can be a benefit to you because you’ll pay less and get more compensation.

Individual Coverage

An individual plan has almost nothing to do with your employer. This is a plan that you go out and get yourself and it sticks to you, not the job. That means if you change jobs your insurance stays in place. The biggest complaint about this insurance is typically that it’s expensive. But you won’t lose it if you leave your job and any benefits you receive are tax free.

Government-Supported Plans

If you’ve been wondering about SSDI or Social Security Disability Insurance and where it comes into play, here’s the information you need. This type of disability insurance is available to anyone, and some of their dependents, if you’ve worked long enough and recently enough and have paid into your social security taxes.

The government also offers Supplemental Security Income (SSI) programs that pay similarly but have different requirements. Both of these plans pay if your disability will last at least a year or to death. There is a five-month waiting period before getting benefits and some report that it’s difficult to qualify.

Questions to Ask Your Insurance Company

Whether you’re going to fund your own long-term disability insurance, or your employer is supplying it, knowing what the details are is important. These are some of the questions you’ll want to ask your insurance company or your human resources manager.

What is the Cost to Me?

Isn’t this the first question everyone wants to know? Of course, it is, so go ahead and ask it.

What Qualifies for a Claim?

Don’t let them dance around this subject. Make sure you completely understand what type of illness or injury will be covered. If there are any exclusions and if you have any specific prequalifying exclusions due to your health history.

What is the Waiting Period?

Long-term always requires a waiting period. Sometimes that gap in income is filled by short-term insurance, other times it’s not. What’s most important is that you know how long that waiting period will be.

How Long Do Payments Last?

Will you be paid for a year or will you get benefits until retirement age? This is obviously one of the most important questions you’ll have. The best policies last until retirement age, but they might cost a bit more, too.

What Happens the Policy is Adjusted?

If you want to add more coverage, make sure you know what’s required of you. Some policies will then require you undergo a physical again, which can delay the effective date of your new policy.

Does My Coverage Only Cover My Occupation?

This one is a little confusing. If you have an own-occupation policy, it means that you’ll be covered if you can’t mentally or physically do your own job. That’s the key there, YOUR job.

The other type of insurance is an any-occupation policy. This policy will pay if you can’t perform any job as long as it fits your education and experience.

Typically, you want an own-occupation policy because you’d prefer to go back to your job with your level of expertise and pay. If the insurance company thinks you can’t perform your job, but you could do something else, if you have an any-occupation plan, they might not pay you.

Back to Work

Finally, you might want to ask if there are any programs set up to help you get back into the workforce after an extended time off. Sometimes the insurance helps with this. In other situations, you’ll have to rely on your employer to help you reacclimate to doing your job again.

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Chris Kolmar

Author

Chris Kolmar

Chris Kolmar is a co-founder of Zippia and the editor-in-chief of the Zippia career advice blog. He has hired over 50 people in his career, been hired five times, and wants to help you land your next job. His research has been featured on the New York Times, Thrillist, VOX, The Atlantic, and a host of local news. More recently, he's been quoted on USA Today, BusinessInsider, and CNBC.

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