As its name implies, a disability policy provides a financial safety net when you are unable to work due to injury or illness. While many people think of broken bones or other accidents as the main reason to use disability, the majority of workplace absences are caused by back injuries, heart disease and cancer, according to the Council for Disability Awareness. Because of the likelihood of a long-term work absence, having both a long-term and short-term disability policy is useful. 

What’s the Difference Between Short-Term and Long-Term Disability?

Disability insurance is designed to replace a portion of your income while you are recovering from illness or injury. The benefits of the policy are paid directly to you, so you can spend the money on whatever you choose. There is a wide range of coverage options available, but many policies cover between 60% to 70% of your income for a period of three months to retirement age. Short-term and long-term disability refers to the amount of time the policy will cover.

The length of time that the policy covers is known as a benefit period. Short-term disability insurance usually covers a term between three to six months. Long-term disability insurance is typically used in yearly increments. These policies can cover anywhere from five years up to retirement age. 

When it comes to the amount of your income that is covered by the policies, short-term disability tends to cover a greater percentage than long-term. You can find short-term policies that cover up to 70% of your income. Long-term policies tend to cover 40% to 70% of your income, paid out over a longer period of time.

While short-term disability tends to pay out benefits within a week or two of your claim, long-term disability insurance requires a period of time known as the “elimination period.” This waiting period is typically around 90 days. For those who choose a long-term policy, it’s important to plan for how you will cover expenses during those initial 90 days. Some companies offer additional coverage that will pay out immediately after an injury or illness stops you from working. 

How Much Does Disability Insurance Cost?

Short-term and long-term disability policies cost about the same — anywhere from 1% to 3% of your salary. Since short-term policies can cost the same for three months that a long-term policy would for multiple years, some people choose to use their own savings for the initial three months before their long-term policy begins to pay out.

How Do I Choose Between Short-Term and Long-Term Disability Policies?

Short-term disability policies are typically used to cover sudden but brief medical issues, such as a broken leg or a planned surgery with required recovery time. They can also be used to cover maternity leave, often compensating up to six to eight weeks of absence, depending on the type of delivery and any childbirth complications.

Long-term policies cover chronic illnesses and permanent disabilities. According to the Council on Disability Awareness, the average length of a long-term claim is 34.6 months. About 95% of these claims are for medical issues rather than workplace accidents.  

When considering whether you should purchase a short- or long-term disability policy, keep the expenses you will need to cover in mind. Calculate your monthly expenses and add a buffer for unexpected medical bills. Once you’ve come up with a number that would cover all of your expenses, you can multiply that amount by the amount of time you may be out of work. This will help you decide on the right level of coverage.

While having only 70% of your income covered may not seem like enough, many policies are purchased with after-tax dollars — which means the payouts are distributed tax-free. For some people, this amount is often comparable to their normal take-home pay. If you purchase your policy pre-tax, however, you will see the difference in the amount of your benefits, so keep that in mind.

Ask yourself some questions about your financial situation. Do you have any savings for emergencies? If you would be unable to cover your expenses for several months while out of work, a short-term disability policy would make the most sense for you. If, however, you have substantial savings, a long-term policy could be the best fit. If you were permanently disabled, do you have enough saved to get you to retirement age and social security payouts? If not, the security of a long-term policy might be the best choice.

Do I Need Both Short-Term and Long-Term Disability Policies?

Depending on your financial situation, it may make the most sense to have both a short- and long-term disability policy. One in four Americans don’t have an emergency fund, so the peace of mind that a short-term policy provides is worth it for many people. If your condition ends up extending past the short-term policy’s benefit period, you’ll be able to start receiving your long-term policy’s benefits immediately. For that reason alone, it makes sense to have both policies, so you can avoid the headache of unexpectedly becoming responsible for thousands of dollars’ worth of expenses.

How Do I Purchase Short-Term and Long-Term Policies?

Many employers are able to offer both short- and long-term disability policies for discounted group rates, making both more affordable than if you were purchasing the policies privately. Reach out to your human resources department for more information. 

Policies offered through employers are beneficial to both the employer and the employee. Employers who offer a robust benefits package can attract and retain high-quality talent, and employees can find peace of mind in knowing that they and their loved ones are properly covered in case of an emergency. Working with a company that specializes in insurance policies for small- and medium-sized businesses is the best way to address your employees’ specific needs at rates that everyone will be able to afford.