Short-term vs. long-term disability insurance

While many of the concepts and terminology used in short-term and long-term disability insurance products are similar, they protect your future in very different ways. Both have advantages, and they are often best when combined.

Differences between short-term and long-term disability

Many believe that a disability is something that happens only to the elderly or to people who work in dangerous occupations. But the truth is that injuries and sicknesses are far more common than most people realize. At some point during their careers, 25% of young people will experience a disabling event that will cause them to miss work for a year or more.1 If that happens to you, what will you do to make ends meet? During these times, disability insurance helps protect one of your most important assets—your ability to earn an income—by replacing a portion of that income if you are not able to work. Workers’ compensation is another form of income protection, but it covers only accidents that happen on the job or disabilities that happen because of a job function, so it does not cover many common issues. While policies will differ in terms and coverage, most generally fall within these guidelines:

How long does coverage last?

As the names suggest, short-term disability insurance is designed to provide a portion of an employee’s income when the employee cannot work for a while. These policies, usually covering a few weeks to a few months, vary by state and by company, so check to see what your coverage is.

Long-term disability insurance, on the other hand, is meant to be a financial safety net that can help protect you from missing out on income during a difficult time and protect your lifetime earning potential. The length is typically several years, like five, 10, or 20. Some policies even last until your retirement age.

Employee-sponsored vs. private insurance

Short-term disability insurance is typically provided by an employer through a group policy. It’s often free as part of your benefits package, but there can be a lot of eligibility requirements, depending on your company and the state in which you live. For example, you may need to be a full-time employee for a certain amount of time before benefits kick in. Individual short-term insurance is far less common, and the costs can be quite high.

Long-term disability insurance is sometimes provided by employers, but not as often. Many people get individual long-term disability insurance through an insurance company. You may already have life insurance or a retirement annuity from an insurance company, and adding a disability policy can be an important addition to your overall financial safety net.

How much do they pay while you’re disabled?

One of the great things about both types of disability insurance is that they pay benefits directly to you, and you can use them to cover expenses however you like. Benefits will vary by policy, but most short-term disability insurance pays around 70% to 100% of your salary. If you rely on commissions or other non-salary bonuses for a significant part of your income, you may want to check with your employer to see if commissions and bonuses are covered. Sometimes, they are not.

Individual long-term disability insurance usually covers anywhere from 50% to 70% of your income, and it more often includes non-salary income in the calculation. In addition to providing coverage for a longer period, this difference makes it more effective for people with commission-based jobs or for those who are self-employed. Some long-term disability policies will also include partial benefits as you recover and return to work, to help ease the transition back.

Related: Can I get disability insurance if self-employed?

Is disability insurance the same as workers’ compensation?

No. Workers’ compensation is a program that is mandated by most state governments for large employers. It covers only injuries and sicknesses that happen on the job, or because of the job. That’s an important distinction because most disabling events happen outside of the work environment. Workers’ compensation usually includes partial wage replacement for the time the employee cannot work, but these benefits vary greatly by state. It’s also important to understand that when you accept workers’ comp, you waive the right to recover damages from your employer through legal means.

What happens if I leave my job?

Most employer-sponsored policies end if you resign, are laid off, or otherwise leave your job, which means you could lose coverage when you need it most. In rare cases, it may be transferable, so check with your employer.

Individual policies purchased from an insurance company are transferable no matter where you work. You can take your long-term coverage with you if you switch jobs or start your own business, with no change to your coverage.

How much do they cost?

The cost can vary greatly depending on your age, your profession, and the options you choose. Generally speaking, an individual long-term policy can cost anywhere from 1% to 4% of your annual income2. Short-term disability can be even more costly for individuals to purchase, which is why it’s usually provided as a group employment benefit. So, is it better to have short-term or long-term disability? The answer is that it’s usually a good idea to consider both. To understand more about what goes into calculating your premiums, take a look at The cost of disability insurance.

The Benefits of Individual Disability Insurance

Individual disability insurance is a policy purchased through a private insurance company. You may already have a life insurance policy or retirement annuity, and often you can add disability insurance to your financial protection plan. There are many reasons you may want to consider individual long-term disability insurance, even if you already have short-term disability insurance from your employer.

• Your current protection is inadequate.
• You don’t plan to stay with your current company.
• You’d like more comprehensive coverage.
• You are self-employed or planning to be.

Customized coverage

With employer-sponsored group plans, you have limited (if any) options in how to structure the policy. Since no two situations are the same, this can leave some without the coverage they need to fully protect their families. With individual long-term disability insurance, you can count on a policy that’s created specifically for your circumstances. This is crucial for your overall financial protection plan and can provide the additional financial security that comes from knowing that you will not miss out on income, even if you miss work for an extended period.

Stays with you

In today’s world, work mobility is becoming more and more important. When you purchase your own protection, it’s yours. That means it can move with you, no matter where you’re employed or what your current job situation is.

Dependable

Once you purchase an individual plan, it won’t change. As long as you continue to pay your premiums, you can rely on the coverage you have and the decisions you’ve made. Your lifestyle and family will be covered, no matter what happens.

How much disability coverage should I have?

Ultimately, you’ll have to balance what you are willing and able to pay in monthly premiums and the amount of disability insurance coverage you’ll receive should you become temporarily or permanently disabled. The average long-term disability claim is just under three years.3 Most people cannot go without a paycheck for even a few weeks. Keep that in mind when you are putting together your financial protection plan.

How do I get disability insurance?

If you’re interested in learning more about disability insurance, the next step is to chat with a qualified agent. There’s no commitment to buy, and an agent can help you customize your policy, explain all of the terms, and give you multiple options for different premiums. 

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¹Social Security Administration, 2021: https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf

²Broad guidelines based on industry data. Actual premiums will vary depending on a number of factors.

³“Are You Underestimating Your Need for Disability Insurance?,” Kiplinger, September 9, 2020.