To the average person, the difference between short-term and long-term disability insurance is obvious: one is short and one is long-term. But the actual differences between these two policies are more nuanced and more important than a cursory evaluation of their names would suggest. If you want to ensure you get the best disability insurance coverage possible, you owe it to yourself to understand the core differences.
Acquisition of Coverage
First, you should know that as an individual, you can optimize your disability insurance for coverage that extends to short-term or long-term situations. According to breeze, you can get only a short-term disability insurance quote, only a quote for long-term coverage, or a quote for a comprehensive policy that includes both. Most of the time, people strive to get both kinds of coverage.
Your quote will be based on a number of factors, including your age, your gender, your current health, your occupation, and other risk factors you may face. Anyone can be disabled at any time, but some people are at higher risk than others. If you have a higher risk profile, you’re going to pay more than someone with a lower risk profile.
Both types of disability insurance policies (short- and long-term) function like most other types of insurance. You’ll purchase these policies through a contract with an insurance company. To maintain them, you’ll be responsible for making ongoing payments known as premiums. Then, if you become disabled, these policies will pay out in a certain way—more on that in the “Payouts” section below.
Duration of Coverage
Now for the obvious: different disability insurance policies tend to cover you for different periods of time.
With a short-term disability insurance policy, you’ll be covered if you’re injured or if you suffer from an illness for a few months. Depending on the policy, you may be covered for 3 to 6 months—or even longer.
By contrast, long-term disability insurance will cover you for a period of years. Depending on the policy, you may be covered for a decade or even longer; in some policies, you’ll be covered with payments until you turn 65 and are no longer eligible. There’s also a small catch with long-term disability insurance; you’ll face a waiting period of at least 90 days before you begin to cash in. In this way, short-term and long-term insurance policies complement each other.
You’ll also see a difference in the payouts of these different policies. Again, much depends on your provider and the details of your policy; you may find two different insurance providers who offer radically different policy details. However, in general, short-term insurance pays out a greater percentage than long-term insurance due to the limited nature of the claim.
For example, you might be able to collect 60 to 80 percent of your typical paycheck when you’re on short-term disability. But on long-term disability, you may only be able to collect 40 to 60 percent of your salary.
The costs of short-term and long-term disability insurance are practically the same. Assuming you’re looking at similar specs for each of these policies, you can expect each policy to cost about 1 to 3 percent of your annual earnings. If you’re currently making $50,000 a year, that means you can expect to pay $500 to $1,500 for short-term disability insurance and $500 to $1,500 for long-term disability insurance, ultimately resulting in an annual cost of $1,000 to $3,000.
There are a few ways you can reduce the costs of these types of insurance policy. For example, you can lower your risk profile. That might mean finding a new job or changing your lifestyle. Of course, not everyone can do this. You might be able to reduce your premiums by bundling your disability insurance with other insurance policies through the same provider; your insurance provider could possibly extend you a discount. Additionally, you can shop with multiple providers to find the best quote.
Employers sometimes offered sponsored disability insurance policies to their employees; in this scenario, the employer pays a portion of the disability insurance premium on behalf of the employee (and sometimes the full amount). Employers who do this typically offer both types of disability insurance to their employees, but this isn’t always the case. It may be better for employees to shop for a policy on their own; it depends on the circumstances.
You may financially protect yourself in ways other than investing in disability insurance. For example, if you build up an emergency fund that can last you 3 to 6 months, you may be able to forgo the need for short-term disability insurance entirely; you can compensate yourself for your temporarily lost salary, without the need to tap into a policy.
However, substituting financial protection for a long-term disability insurance policy is trickier. If you have a sizable nest egg and you’re nearing retirement, long-term disability may no longer be a concern. Otherwise, long-term disability insurance may be a practical requirement to protect yourself.
Like any insurance policy, disability insurance is designed to protect you financially. Just as a vehicle insurance policy will protect you in the event of a collision or theft, your disability insurance policy will protect you if you’re ever unable to work.
Anyone can become disabled. It doesn’t matter how young you are, how healthy you are, or how well you take care of yourself. All it takes is one illness, one injury, or one freak accident to render you unable to earn a living. Accordingly, it’s recommended that all workers have some kind of disability insurance policy in place.
Finding the Right Policy
There are many variables to consider when searching for a short-term or long-term disability insurance policy (or both), including premiums, payout percentages, and duration of coverage. Make sure to shop with multiple providers so you can get a better understanding of the market and choose the right policies for your personal needs.