The pros and cons of buying short term disability insurance outside your workplace
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Every person who works for a living is at risk of losing their income because of a disability. One in four 20-year-olds will become disabled before reaching retirement age.1 Many think disability insurance is only for people who work in places like construction sites where on-the-job accidents are common. However, the illnesses and injuries that are that are covered by short-term disability insurance do not need to have occurred on the job. In fact, common qualifying conditions include pregnancy, chronic conditions such as back pain, depression, illnesses such as cancer, heart disease, or even arthritis.2
Short-term (STD) and long-term (LTD) disability insurance help protect your income by paying a monthly cash benefit if you are unable to work. LTD can be purchased individually through an agent or with a group plan via the workplace; STD is usually purchased as part of a group plan through the workplace. In fact, many prominent disability insurers, such as Guardian, only offer short-term disability through employers.
Should you purchase a short-term plan as an individual? This article can help you decide by explaining:
The role of short-term disability insurance versus long-term disability insurance
Why STD is sold separately from LTD
How to get short-term disability coverage as an individual
Frequently asked questions about STD coverage
Why you need short-term disability insurance and long-term disability insurance
These two kinds of coverages are often complementary. In essence, they should work together to pay benefits that protect at least 60% of your income, as opposed to being an either/or choice. In many respects, LTD and STD policies do the same thing, replacing a portion of your income when you’re sick or injured and unable to work. Though the benefit periods for these policies can vary, with short-term disability insurance typically covering 90-180 days and long-term disability insurance covering up to retirement. The disability benefits you receive can be used for anything you need, including:
Rent or mortgage
Utilities
Credit card and loan payments
College or childcare
Groceries
Even things like going to the movies or dining out
Every policy – whether long term or short term – has five basic features:
Premium: The monthly or annual amount you (or your employer) pay for coverage.
Benefit: The portion of your income you get each month you can’t work, usually between 50% to 80% of your monthly salary.
Benefit period: The length of time you can receive benefits. For STD this will typically be 90-180 days; for LTD it could range from two years to retirement.
Waiting period: Also called the elimination period, this is the amount of time after you are disabled until you can start receiving benefits, typically 2 weeks for an STD policy, and 3-6 months for an LTD policy. The benefit period of your STD plan should match the elimination period of your LTD plan, to ensure there’s no lapse in income.
Definition of disability: Every disability policy has a specific definition of what it means to be disabled in order to qualify for benefits. LTD plans take this a step further by defining “own-occupation” disability (you qualify if you can’t work in your field) or “any-occupation” disability (you only qualify if you can’t do work that you’re qualified for based on your education, training, and experience).
Why STD is sold separately from LTD
If STD and LTD both do the same thing, why are they split into two types of policies which are often purchased differently? There are a few reasons.
For one, short-term disabilities are much more common than long-term disabilities, and coverage may be provided by the government. Also, people with temporary disabilities have different needs than those with more permanent disabilities. For example, in addition to pay replacement-related benefits, many group STD plans may have a number of rehabilitation benefits and features.
Short-term insurance may also be sold more efficiently as group coverage. People at a given company in a specific industry are more likely to experience the same kinds of disabilities, so it’s easier for the insurance company to calculate the risk involved. And coverage doesn’t need to be very personalized, because the desired outcome is the same every time: to get the disabled employee back to work with as little disruption as possible.
By contrast, long-term disability needs are much more individualized. With a potentially much longer, larger payout, there’s more risk to the insurance company. The age, health status, lifestyle, and occupation of each person insured must be assessed. The benefit amount, period, and premium can vary significantly from one policy to the next. While LTD may be purchased as part of a group, it can be tailored more precisely to a policyholder’s needs when sold individually.
As a result, STD coverage is most often provided by employers, as an affordable or no-cost group benefit to all employees. STD and LTD benefits are taxable if the premium is paid for by your employer, and non-taxable if paid for on a post-tax basis.
How to get short term disability insurance
Purchase an individual plan through your employer
If your company doesn’t provide STD coverage, you still may be able to buy it as a “voluntary” benefit (an optional benefit you pay for yourself):
Workplace plans can offer broader coverage, such as coverage for complications of pregnancy and childbirth. That’s important, because around 20% of women are prescribed bed rest and restricted activity when pregnant.3Coverage you get through work will generally come at a lower group cost, even if you are paying the entire premium.
Purchase an individual plan through an agent or broker
There are a number of drawbacks to purchasing short-term disability insurance on your own:
Costs are usually higher compared to an employer plan with group rates.
Acceptance is not automatic: Underwriting (i.e., the insurer’s risk evaluation process) is more stringent, and they will want to assess your age, health status, and other factors before issuing a policy.
Pregnancy, if covered, will be considered a pre-existing condition if you are already pregnant. With a group policy, that may not be an issue.
Alternatives to getting your own short-term disability insurance
Mandated state plans
Some states offer state-sponsored disability income protection for their residents. These state-mandated plans provide disability income insurance for non-work-related injuries. State-mandated and funded through employee payroll deductions, these plans are for non-work-related disabilities, and they provide short-term wage-replacement benefits to eligible workers. To see if your state offers this type of program, contact your state’s Department of Labor or Employment.
The Family and Medical Leave Act (FMLA)
FMLA lets eligible employees take up to 12 weeks of unpaid, job-protected leave in a 12-month period for specified family and medical reasons. For more information on this Federal Law visit the Department of Labor website at www.dol.gov.
Accident insurance and critical illness plans
This is coverage that typically provides a cash payment — as opposed to ongoing disability income replacement — if you suffer an accident or are diagnosed with a major health issue. The benefit is paid even if you don’t miss work and can be used for any purpose.
These types of plans are offered as a voluntary benefit by many employers. Is short-term disability insurance worth buying as an individual?
Group STD benefits through work can be useful, because they provide valuable disability income to cover essential living expenses often at little or no cost to the employee. But STD benefits purchased as an individual is a different story: plans tend to be expensive and come with a number of limitations.
Many experts believe that individuals without employer-provided short-term disability are better off investing in a long-term disability plan, while relying on savings or one of the alternatives above for short-term needs. It’s an issue worth talking about with your financial professional. To get the most out of your time, be prepared to share as much as you can about your financial situation and goals so that he or she can tailor your disability policy to better meet your short and long-term protection needs.