Preserve Your Paycheck: Short-Term vs. Long-Term Disability

Bad things can happen in an instant. As an example, I backed my car into a tree this morning and the damage is significant. Just as quickly as I crunched my rear bumper, you could shred your knee at a softball game or -- worse -- receive a health diagnosis that permanently affects your ability to work. 

In either situation, disability insurance could be the protection that saves you from financial ruin. 

What is disability insurance? 

Disability insurance replaces a portion of your income if you are unable to work. The funding available through your disability insurance can be temporary or last until retirement, depending on the terms of your policy. There are no restrictions on how you use the income, but most beneficiaries use disability insurance payments to cover living expenses. 

If you're healthy and strong today, you may have trouble imagining how injury or illness could keep you away from work indefinitely. But here's a statistic that might surprise you. One in four of today's 20-year-olds will become disabled before age 67, according to the Social Security Administration.¹ That means 25% of the 20-year-old population would likely benefit from having disability insurance in place.

The key parts of a disability policy to understand are: 

• Benefit: The benefit is the income you receive when you can't work. Your policy may express the benefit as a percentage of your salary or a flat, monthly dollar amount.

• Benefit period: The benefit period defines how long your insurance pays out the income. 

• Waiting period, also called elimination period: The waiting period is how long you must wait after you are disabled before you can receive benefits.

• Disability requirements: Your policy will define what it means to be disabled and how you qualify for benefits. 

Some terms you might see in a policy's disability requirements are: total disability, partial disability, own occupation, or any occupation.

• A total disability prevents you from doing your job in any capacity. 

• A partial disability limits you from doing certain aspects of your job and lowers your earnings potential. You might be able to work part-time, for example, instead of full-time.²

• Own-occupation disability means you cannot work in your former occupation. 

• An any-occupation disability is a condition that prevents you from working in any occupation that might suit you, including jobs that require additional training.

Short-term disability insurance vs. long-term disability insurance 

Disability insurance comes in two varieties, short-term disability and long-term disability. The table below highlights the key elements of each.

Short-term disability insurance has a short waiting period, but also a short benefit period. You can start collecting from your short-term insurance quickly, but the income often won't last longer than one year. 

Long-term disability has a lengthier waiting period and a longer benefit period. You might need to wait three or six months to collect, but some policies will keep paying until retirement if your condition lasts that long. 

Do you need short-term disability, long-term, or both?

Having both short-term and long-term disability provides the most coverage. In that scenario, you'd collect on the short-term policy first. When the short-term benefits run out, you would transition over to your long-term insurance if your condition persists. 

Emergency fund in lieu of short-term disability 

If you must choose between short-term coverage and long-term coverage, paying for ample long-term disability is often the better option. Here's why. You can self-insure against short-term issues with a cash savings account. 

To do that, you'd save enough cash to cover your living expenses for the duration of your long-term disability waiting period. In the event of injury or illness, you'd live on your cash savings initially. As soon as you fulfill the waiting period, you would use your long-term disability income to pay your bills.

The drawback of this strategy is you may have trouble replenishing your emergency fund while you are living on long-term disability income.

Social Security Disability Insurance and LTD

Social Security Disability Insurance (SSDI) is government-sponsored, long-term disability insurance. You earn SSDI benefits by working and paying Social Security taxes. If you work full-time, it normally takes 10 years to qualify for SSDI.⁹ 

SSDI has a five-month waiting period and benefits last until retirement. The income you'd get depends on how much you make, but it's usually about 50% of your former earnings.¹⁰ 

Long-term disability insurance supplements your SSDI. Your combined benefit from private insurance and SSDI typically won't exceed 100% of your prior earnings. But having the insurance gets you closer to full income replacement vs. receiving SSDI by itself. 

Disability insurance vs. health insurance

If you are sick or injured, your health insurance and disability insurance fill two different financial needs. Health insurance pays some of your medical bills. Disability insurance replaces your paycheck, or part of it -- so you have cash to cover your housing and other living expenses. 

Where to get disability insurance 

The first place to look for disability insurance is through your employer. According to International Foundation of Employee Benefit Plans, 78% of employers offer short-term disability coverage and 63% offer long-term disability insurance.¹¹ Your employer may even subsidize the rates to make them more affordable.

You can also buy disability coverage independently. Buying direct from an insurance company is a good option if your employer doesn't offer disability insurance or if you are self-employed. 

Insurers that offer disability insurance 

• Aflac 

• Ameritas 

• Assurity 

• Breeze 

• Guardian Life 

• MassMutual 

• Mutual of Omaha 

• Northwestern Mutual 

• Principal 

• RiverSource

• Standard

• Thrivent

• Zander Insurance 

Cost of disability insurance 

Generally, short- and long-term disability insurance costs 1% to 3% of your income, for each policy. If you plan on purchasing both types of coverage, you're looking at spending up to 6% of your paycheck. 

Your exact premiums can vary, though. When you buy short-term disability coverage outside of your employer, the carrier looks at several factors to set your rates, including: 

• Your income 

• The benefit period 

• The waiting period¹² 

Long-term disability carriers additionally look at: 

• Your age and health

• Where you live 

• Your occupation¹³ 

Disability insurance sample premiums  

The table below shows sample premiums for disability insurance through Breeze.

Table data source: Meetbreeze.com

Optional disability insurance riders 

You can also customize short- or long-term disability insurance with riders. Riders expand your coverage or increase your benefit in some way. For example: 

• Benefit increase rider: A benefit increase rider raises your income payout by a set percentage each year. The increases normally don't begin until after you've received benefits for one year. 

• Own occupation rider: An own-occupation rider allows you to collect benefits if your disability affects your ability to perform your current job, even if you may be capable of doing a different job.¹⁴ 

• Guaranteed insurability rider: A guaranteed insurability rider gives you the option to add to your insurance without submitting another application. 

• Residual benefit rider: A residual benefit rider allows you to collect benefits if you become disabled but can still work part-time.¹⁵ 

• Supplemental DI rider: The supplemental DI rider pays a monthly benefit less any government-funded benefits. As an example, your Supplemental DI rider may add $1,200 to your base monthly benefit. If you later qualify for SSDI of $1,000 per month, your Supplemental DI rider would pay $200 monthly on top of your base benefit and the $1,000 you receive from SSDI. 

Short- and long-term disability for income protection 

You can't predict the medical issues that could keep from working. What you can do is think through how the loss of your paycheck might affect you. Doing so will help you understand whether disability insurance is a good investment for you.

As an example, short-term disability is a wise choice If you don't have enough cash to fund six months of your living expenses. And, if you don't qualify for SSDI or you can't maintain your lifestyle on 50% of your income, long-term disability coverage should also be a consideration. 

Whatever your financial situation is today, any form of disability insurance provides peace of mind. If something bad happens that affects your ability to work, at least you know you'll have some funding coming your way.