Short-Term Disability Insurance

Female caregiver helping older man walk with crutches

Jose Luis Pelaez Inc / Getty Images

Short-term disability insurance pays a percentage of your salary if you become temporarily disabled, which means that you are not able to work for a short period of time due to sickness or injury not related to your job (workers' compensation coverage would provide income replacement if the disabling condition is due to a work-related injury). Typically, a short-term disability policy provides you with 40% to 80% of your pre-disability base salary.

Caregiver helping man walk on crutches in his house
Jose Luis Pelaez Inc / Getty Images

Some people have short-term disability insurance through an employer, union, or other professional organization. This type of policy is known as group coverage. You can also purchase an individual policy directly from an insurance company or agent, although it will generally be more expensive to purchase the coverage on your own.

And if you purchase your own short-term disability policy, you'll likely need to go through medical underwriting and financial underwriting, as opposed to the guaranteed-issue coverage you can get if your employer offers group coverage for short-term disability.

How Short-Term Disability Insurance Works

Most short-term disability policies have the same general design. You, or your employer, pay a monthly premium to be covered. When an illness or injury prevents you from working, you apply for a benefit by speaking with someone in your company’s human resources department or your insurance agent. You might have to pay taxes on the money that you receive from the disability policy, depending on whether the premiums for the policy were paid by you or your employer, and whether they were paid with pre-tax or post-tax money.

Most short-term disability policies require evidence from your doctor that explains your condition and estimates how long you’ll be gone from your job. Most likely, there will be a waiting period between the date you leave work and the date when you're eligible to receive benefits, although short-term disability policies typically kick in within two weeks.

Your employer may require that you use some or all of your sick days before the policy begins to pay. Once the waiting period is over, you will generally receive a set percentage of the wages you received before you were disabled.

For example, if you were paid $1,000 per week, and your policy pays 60% of pre-disability earnings, you’ll get a benefit of $600 per week. Short-term policies generally pay benefits for between three and six months, although some will offer coverage for up to a year or more (benefits end when the disability ends, if that happens sooner than the date the policy would otherwise stop paying benefits). If you're still unable to work when your short-term disability benefits end, you may be eligible to receive long-term disability benefits if you have a long-term disability policy, or you can apply for Social Security Disability Insurance, depending on the circumstances.

Pregnancy and maternity leave is a very common trigger for short-term disability claims. Family and Medical Leave Act (FMLA) rules allow 12 weeks of unpaid leave, but short-term disability insurance can be used to ensure that a new mother receives a percentage of her normal paycheck during at least some portion of her maternity leave.

Under the Affordable Care Act (ACA), large employers are required to offer health insurance to full-time workers, and full-time is defined as 30 or more "hours of service" per week. In 2015, the IRS clarified that time for which an employee receives disability benefits (short-term or long-term) is considered "hours of service" which means that the employer has to continue to offer health insurance benefits as long as the employee is still considered an active employee (note that the ACA does not require employers to offer any type of disability insurance, but if they do, and if an employee is receiving disability benefits, those hours still count as hours of service).

How Is Long-Term Disability Insurance Different?

Long-term disability insurance is also designed to replace a portion of your income when a disability prevents you from working, but it will pay benefits for much longer than a short-term disability plan. Long-term disability coverage generally doesn't start paying benefits until you've been unable to work for at least a month, and sometimes for as long as a year or two. Most plans have a waiting period of 3-26 weeks. But then once the benefits start, they continue for years. Depending on the policy, they may even continue until you reach retirement age.

Many workers have both short-term and long-term disability insurance, because the two products can work in tandem to ensure that the disabled worker has access to partial income replacement for almost the full length of the disability. 

An example of complementary policies would be a short-term disability policy with a two-week waiting period, that replaces 70% of the worker's pay for three months, combined with a long-term disability policy that has a three-month waiting period and then replaces 60% of the worker's income for up to ten years (the length of time that a long-term disability plan will pay benefits varies from one plan to another, but it's measured in years, rather than weeks or months).

Long-term disability coverage is more expensive than short-term disability coverage, since the potential payouts are much larger, given the length of time that a person could be receiving benefits.

How Short-Term Disability Policies Differ

While most short-term disability policies have similar features, each may have different specifics.

Definition of Disability: Some short-term disability policies define a disability as an inability to work at your own job. These are known as “own occupation” definitions of disability. Other policies define disability as an inability to work in any job, known as an “any occupation” definition. Social Security disability benefits only apply in cases of long-term disability, and are based on an "any occupation" definition. So if you're not able to return to your regular work but you are able to do at least some type of work, the Social Security Administration will not provide you with disability benefits. But private insurance companies can offer more generous benefits, in trade for the premiums you (or your employer) pay. 

Service Wait: Some employers will only offer short-term disability plans after you have worked for them for a set period of time, for example, six months or one year.

Waiting Period: This is also referred to as an elimination period, and it's the time between when you become ill or injured, and when your disability insurance benefits begin. Most short-term disability plans have waiting periods of 0 to 14 days. Generally, policies with a longer waiting period have lower premiums. Many short-term disability plans have different waiting periods for different types of disabilities. For example, a plan may have a seven day waiting period for an illness and no waiting period for an accident that happened outside of work.

Benefit Rates: Benefit rates vary, but are generally between 40% and 80% of your pre-disability earnings. If you want the higher rate, you may have to pay a larger premium. Some short-term disability policies change benefit rates during the benefit period. For example, your policy may pay 80% for the first three weeks of disability and then 50% for the remainder of your benefit period.

Benefit Periods: Short-term disability policies are intended to replace a portion of your income when you can't work for a relatively short period of time, usually three to six months. Some short-term disability policies will continue to pay benefits for up to two years, but those are less common (note that long-term disability coverage, described above, is a different type of policy that will continue to pay benefits for up to several years or even up to age 65 under some plans; long-term disability insurance is substantially more expensive than short-term disability insurance). Your short-term disability policy may allow you to return to work on a trial basis. For example, your policy may give you a two week trial period. If you go back to work for less than two weeks and then find that you can’t do your job because of your disability, the policy would allow you to continue your benefits as if you hadn’t returned to work.

Changes to your premium: If you sign up for a “noncancelable” short-term disability policy, the insurance company cannot change your premiums or benefits. However, if you sign up for a “guaranteed renewable” policy, the insurance company is allowed to change your premiums, but only if they are changing it for an entire group of policyholders. The best coverage comes with plans that are both noncancelable and guaranteed renewable, but those plans also tend to have higher premiums.

Exclusions: Many policies will not cover disabilities caused by suicide attempts, drug abuse, war, or attempts to commit a crime. Pre-existing conditions are also frequently excluded, although this is often a temporary exclusion for employer-sponsored plans (in other words, an employer-sponsored short-term disability policy might have a waiting period of one year, after an employee is enrolled in the plan, before it will pay disability claims related to the employee's pre-existing conditions). On-the-job injuries, which are covered by workers’ compensation insurance instead, also are not covered.

How to Get Short-Term Disability Insurance

Signing up for a Group Plan
Your employer may offer a short-term disability plan as a job-related benefit option. If your company offers short-term disability insurance, you can sign up for the plan during your initial enrollment period (when you first become eligible for benefits), or during your employer's annual open enrollment period. 

You may be required to have coverage under the policy for a certain period of time before a pre-existing condition is covered (known as an exclusionary period). The ACA eliminated the use of pre-existing condition waiting periods and exclusions for health insurance benefits, but it did not change the rules relating to disability insurance. Details about how pre-existing conditions are handled will be in the short-term disability insurance information that your employer provides, so be sure to read the fine print.

Rules concerning short-term disability insurance vary from state to state. If you think your company or the insurer is not treating you fairly, check with your state’s insurance department. You can access your state's insurance department through the website of the National Association of Insurance Commissioners.

Signing up for an Individual Policy

If you're self-employed or work for an employer that doesn’t offer short-term disability insurance, you may want to consider buying an individual policy. You will have to undergo medical underwriting to get an individual short-term disability plan (again, the ACA didn't change anything about this; health insurance is guaranteed issue regardless of medical history, but disability insurance is not).

And the insurer will also need to examine your finances, including your current income, to make sure that the policy won't provide excessive benefits (this is a more straightforward process with employer-sponsored disability policies, since they're just designed to replace a certain amount of the income you earn from the employer that's sponsoring the disability policy).

When shopping for an individual policy, look for a reputable company and be sure to read all of the details of your policy. Your state's department of insurance can answer questions about the financial security and complaint histories of the companies that offer policies in your area.

You can find ratings of insurance providers at the following websites:

  • Moody's
  • A.M. Best
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Article Sources
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