Disability insurance protects you from a loss of income if you become sick or injured and can’t work. However, not all disability insurance policies are the same. The type of coverage you purchase determines how long it takes for your benefits to begin and how long you may continue to receive them.
Understanding the differences between short-term vs. long-term disability insurance can help you decide which policy is best for your needs. Here’s what to know.
Understanding Short-Term vs. Long-Term Disability Insurance
Both short- and long-term disability insurance are designed to replace a portion of your income when you can’t work due to a covered illness or injury. However, each type has its own rules that determine when you qualify for coverage after experiencing a disability, known as the elimination period. Additionally, both have different timelines for how long the policy pays out, known as the benefit period. These are the main differences between the two policies.
While the same general principles apply to each type of insurance, the details differ between individual policies and the insurance companies that issue them. Carefully read your contract before signing so you know what you’re buying and what your particular policy covers. You may also want to compare several quotes to ensure you’re getting the best coverage at the best rate.
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Short-Term Disability Insurance
Short-term disability policies have shorter elimination and benefit periods than long-term disability policies. You can choose the amount of income you want replaced—70 or 80 percent are common.
Elimination Period
Short-term disability policies begin making payments quickly. Two weeks is a common elimination period, although it could be shorter or slightly longer. Most people use sick pay or vacation days to bridge the gap between when they’re out of work and when payments begin.
Benefit Period
On a short-term disability policy, the benefit period can be as long as a full year, but three to six months is more common.
If you have an adequate emergency fund, short-term disability insurance may not be necessary. However, you may still want to purchase a policy with a longer elimination period or lower coverage amount to prevent you from depleting your savings.
Long-Term Disability Insurance
Long-term disability policies require you to wait longer to begin receiving benefits, but they also pay you for a longer period.
Elimination Period
Long-term disability policies often have a 90-day elimination period. You generally don’t receive benefits until an illness or injury has kept you out of work for a few months. This is why it’s important to have adequate savings or pair your long-term policy with short-term coverage.
Benefit Period
For long-term disability insurance, the benefit period is at least one year but could be several years or even decades long. Generally, the longer the benefit period you choose, the more expensive your policy.
Own-Occupation vs. Any-Occupation Coverage
Another key consideration when choosing a long-term policy is whether it covers you if you can’t perform your current job or any job.
Own-occupation policies cover you when the covered illness or injury prevents you from doing your current work. This is a narrower definition that covers you under more circumstances.
If you’re specially trained in a given profession (such as a doctor, skilled artist, or specialty mechanic), you may want to purchase an own-occupation policy. These policies are often more expensive but provide a greater level of protection.
In contrast, any-occupation policies provide benefits only if you can’t perform “any” job. You typically don’t receive benefits if you can still work, even if that work is in a completely different industry.
Any-occupation policies may be a better option if you don’t work in a specialized field and could reasonably expect to replace your income if you had to switch careers. These policies are typically less expensive and provide plenty of coverage.
How to Buy Disability Insurance
You can purchase each type of policy on your own or through a group plan if one is available to you.
You can purchase an individual policy through an insurance company, similar to buying auto, home, and life insurance. To find a policy, you can begin your search online or talk to an insurance agent. It’s a good idea to get a few quotes for comparison.
Group policies are often provided as part of an employee benefit package through your work. In some cases, your employer may pay your policy premium. If not, you may be able to deduct your premiums from your paycheck as an optional benefit. If your employer doesn’t provide a policy, you may be able to obtain group coverage through a trade organization, union, or other group you belong to.
Are Disability Insurance Benefits Taxable?
Whether your disability benefits are taxable depends on who pays for them and whether the premium dollars were taxed.
If your employer pays for your benefit, you likely weren’t taxed on the premium dollars. If you receive a disability payout, you typically have to include your benefits in your taxable income.
If you pay for your own policy, your benefits aren’t usually taxable (provided you were taxed on the dollars you used to pay premiums).
If you and your employer each pay a portion of your premium, you’re typically only taxed on benefits attributable to the employer’s premiums.
Deciding between Short-Term vs. Long-Term Disability Insurance
While short- and long-term disability insurance policies have several differences, both exist to support you during times of financial strain. When deciding between the two types of coverage, assess your individual situation and consider how a loss of income might affect you and your loved ones.
If you have questions or want more information about the different types of policies and benefits they provide, consider reaching out to a qualified financial professional.
Insurers and their representatives are not permitted by law to offer tax or legal advice. The general and educational information here supports the sales, marketing or service of insurance policies. Based upon individuals’ particular circumstances and objectives, they should seek specific advice from their own qualified and duly-licensed independent tax or legal advisors.
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