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Short-term vs. long-term disability insurance

Many employers offer disability income insurance to their employees in case they’re unable to work, and in some states, this insurance is mandated. There are various types of disability insurance policies, but there are two primary types you should be familiar with: short-term and long-term disability insurance.

Below, we’ll go over what short-term and long-term disability insurance are, comparing the advantages and disadvantages of both.

What is disability insurance?

Disability insurance is a type of insurance policy that can provide you with income in case you become sick or injured. If your injury or sickness prevents you from working, disability coverage can serve as a safety net. The disability insurance benefits will provide you with a temporary income you can use to cover expenses while you recover.

What’s considered a disability varies from policy to policy and may cover anything from physical injuries to mental illness to pregnancies. Oftentimes, you can purchase additional coverage for specific circumstances.

How does disability insurance work?

Disability insurance can provide you with an income when you’re too sick or injured to work. Generally, these disability insurance policies cover a portion of your monthly pre-disability income so that you can still provide for yourself and your family.

The cost of disability insurance depends on the amount of income you’re earning. Typically, you should expect to pay about 1%–3% of your annual salary to receive coverage. However, sometimes employers sponsor disability insurance policies, but keep in mind that employer-sponsored plans only last for the term of your employment. If an employer doesn’t offer disability insurance or you don’t like the available options, you can purchase an individual policy through an insurance company.

If you get sick or injured and are unable to work, your insurance policy won’t pay out disability benefits immediately. Rather, you’ll have to go through a waiting period, known as the “elimination period,” after filing a disability claim. The elimination period is established before you even sign up for your disability insurance policy. Generally, the longer the elimination period, the cheaper the policy’s going to be.

Once your policy starts paying out, the amount of time it lasts depends on something called the “benefit period.” In general, a policy’s benefit period can be as short as three months or, in some cases, benefits can stretch into retirement. The length of time you receive benefits also varies and depends on whether you purchase short-term or long-term disability insurance. We’ll discuss the differences between these two types of policies in more detail below.

What is the difference between short-term and long-term disability insurance?

Let’s look at the differences between short-term and long-term disability insurance. These are the two primary types of disability insurance policies. It’s important to know the distinctions between the two, as they’re very different, and each has its pros and cons.

So, what is short-term disability insurance? As the name suggests, short-term policies issue benefits for a relatively short period of time. Short-term disability benefits usually last for three to six months, but almost never longer than a year. Short-term disability policies generally have a short elimination period when compared with long-term policies.

Long-term disability policies typically pay out benefits for a longer period—usually several years rather than months. This kind of policy insures against long-lasting, and sometimes even permanent, illnesses and injuries. Long-term disability coverage has an extended elimination period, which usually lasts at least 90 days.

What qualifies as short-term vs. long-term disability?

Short-term and long-term disability insurance policies are designed to cover different types of disabilities. Short-term disability coverage insures against temporary ailments, while long-term policies cover serious issues that can have lasting effects. Below are a few example conditions for each type of policy.

Short-term disability:

  • A disruptive injury
  • Digestive disorders
  • Joint disorders
  • Back disorders
  • Persistent sickness
  • Recovery from a major surgery

Long-term disability:

  • Cancer
  • Prolonged mental illness
  • Cardiovascular diseases
  • Muscle disorders
  • Dementia
  • Multiple sclerosis
  • Epilepsy
  • Parkinson’s disease

Some disability insurance plans may have more exclusions than others. For instance, one long-term disability plan may define a serious illness differently than another plan.

It’s also important to understand how pregnancy may fall under disability insurance. Generally, short-term disability insurance can be used to cover maternity leave. However, certain conditions may allow long-term disability insurance to be used, as well. Pregnancies that involve bed rest, leave as a result of postpartum disorders, and other factors may qualify for long-term disability insurance.

How long do benefits last for short-term vs. long-term disability insurance?

One big difference between short-term and long-term disability insurance is how long the benefits last for each – and how quickly an employee can access their funds.

Benefit periods for short-term disability insurance

As we mentioned above, short-term disability insurance benefits typically pay out for three to six months. In certain cases, the benefit period for a short-term policy could last up to a year.

Short-term disability insurance begins paying benefits within a few weeks following a qualifying injury or illness.

Benefit periods and elimination periods for long-term disability insurance

The benefit period for long-term disability insurance is much longer. Long-term disability insurance benefits can pay out for as little as two months or extend all the way until the user reaches retirement. Typically, you can purchase long-term policies that last two, five, or ten years, or until retirement age.

It’s important to note that long-term disability insurance may not provide funds immediately. Long-term disability insurance requires an extended waiting period, referred to as an elimination period, before the employee can begin receiving benefits.

While elimination periods vary based on policy, the industry average is around 90 days.

Does long-term disability insurance pay more than short-term disability insurance?

Since long-term disability insurance policies have longer benefit periods, they tend to pay out more than short-term policies, over time. However, short-term policies typically provide a larger income replacement than long-term policies. Short-term disability insurance policies typically cover approximately 60% to 70% of an employee’s base pay, while long-term disability insurance may cover as much as 80%. Generally, the benefit amount varies on a case-by-case basis depending on your plan.

Cost difference for short-term vs. long-term disability insurance

As discussed, factors such as benefit period and elimination period length can affect the cost of a disability insurance policy. However, various other factors also play a role in determining the cost of a disability insurance policy, such as the following:

  • Occupation
  • Income
  • Age
  • Preexisting health conditions
  • Policy choices and add-ons

The cost of both short- and long-term disability insurance policies is calculated as a proportion of your annual income. If you take out a disability insurance policy, expect to pay a small portion of your income, roughly 1%–3% of your salary, in premiums. Keep in mind that if you’re on an employer-sponsored plan, your premiums may be lower or entirely free of charge.

Are employers required to offer disability insurance?

In most states, employer-sponsored disability insurance is optional. However, some states require employers to offer disability insurance to their employees. For example, California, Hawaii, New Jersey, New York, and Rhode Island require employers to provide some form of disability insurance coverage. Puerto Rico also requires employers to take out a disability insurance policy for workers.

Should a business offer disability insurance even if it’s not required?

If your small business is located in a state that doesn’t mandate employer-sponsored disability insurance, then offering it is up to you. Perhaps your business operates on tight profit margins and can’t afford employer-sponsored disability insurance at the moment. In that case, you can still help employees purchase disability insurance policies. The premiums will just be deducted from their paychecks, similar to certain payroll taxes such as Social Security or Medicare.

If your company can afford disability insurance, there are a few reasons you may consider taking out a policy. First and foremost, an employer-sponsored disability insurance plan is an attractive employee benefit for many workers. You can use this as a recruiting tool to draw in talented workers who stay loyal to your company. Plus, a company disability insurance policy can help facilitate a positive work culture by letting employees know you care about their health and wellbeing.

Ultimately, the decision is up to you. But, if you do decide to sponsor a disability insurance policy for employees, you’ll need a way to administer benefits. This is where QuickBooks Payroll comes in. With our easy-to-use payroll software, you can keep employees happy by quickly and efficiently administering benefits as soon as they’re needed.

Get HR support and benefits

Offering employees benefits like an employer-sponsored disability insurance policy can be a great way to attract top talent. Additionally, a disability insurance policy can ensure that your employees are able to support themselves should sickness or injuries strike. Yet, an insurance policy is almost useless if it can’t be administered effectively and in a timely manner.

With QuickBooks Payroll, managing employee benefits for small businesses has never been easier. Using our software, you can run payroll, administer benefits, and take charge of human resources for your small business , all in one place. This makes it simple to support your workers when they need it the most. Best of all, it’s a payroll system that can save you valuable time, money, and energy as a small business owner.


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