It’s hard to imagine becoming disabled, and harder still to think about it lasting more than a few weeks. But serious disabilities can last years, or even a lifetime. That’s why you should know if your disability insurance policy offers long-term or short-term benefits, and understand the difference between them.
What’s the difference?
Long-term and short-term disability policies have different purposes. Short-term disability income insurance is designed to pay benefits sooner and for a shorter period of time than long-term disability income insurance.
Under the terms of your disability insurance policy, you’ll have to wait for a certain amount of time after you become disabled before receiving benefits. Some policies, typically short-term policies, even offer two waiting periods — a shorter one for accidents and a longer one for illness. Depending on the terms of the policy, your waiting period for short-term benefits will generally range from 0 to 14 days. Your long-term policy waiting period can range anywhere from 30 to 720 days, although a 90-day waiting period is most common.
If you experience a disability, you’ll receive benefits until you recover or reach a certain maximum. The maximum is usually up to two years for a short-term policy. However, many of these policies only pay benefits for three months to one year. On the other hand, long-term disability policies generally pay benefits for a far longer period. In some cases, these policies will pay for more than two years, up to age 65, or even for your lifetime.
Where can I buy disability insurance?
You can buy disability income insurance through:
- A private company that sells individual policies.
- An association that offers policies as a benefit of membership.
- Your employer, who may offer you a certain amount of disability insurance at no cost as part of your employee benefits package.
Should I buy long-term or short-term disability income insurance?
If you have to choose just one, it generally makes more sense to buy long-term disability coverage. That’s because you may be able to financially survive a disability in the short-term, even without insurance. Long-term disabilities, on the other hand, can seriously threaten your finances if you do not have insurance.
Consider the following before you decide on the type of insurance you’re going to buy:
- Other kinds of protection. If you become disabled, you may be eligible for benefits from a government-sponsored disability insurance program like Social Security or workers’ compensation. Your employer may also provide coverage — although companies tend to offer short-term coverage more frequently than long-term coverage. Don’t buy a policy that duplicates coverage you already have elsewhere.
- The type of coverage you can afford. Short-term coverage is typically less expensive than long-term coverage because benefits are paid for a shorter period of time.
- Other sources of income. Do you have other sources of income that could help you through a short-term disability that prevented you from working? Examples include savings and investments, or perhaps a spouse’s paycheck. Look at your current resources to help determine if you could weather the storm on your own, or if you’d need insurance to help keep you afloat.
How much disability insurance should I buy?
The amount of insurance you need depends on the amount of monthly expenses you would need to cover if you were unable to work. To help figure this out, start by totaling up your monthly expenses. Then, figure out which expenses might be reduced or eliminated if you become disabled. Some examples include buying new clothes for the office, commuting fees, or meals at restaurants. Be aggressive with reducing or eliminating potential expenses, as some disability insurance policies will only allow you to purchase coverage that equals up to 60% of your current income. If you have a budget, going through each line item can be a good place to start your analysis.
Once you’ve done this, subtract the expenses you anticipate being reduced or eliminated from your current monthly expenses. This should give you a general idea of how much money you’d need to get by in the event of disability. The gap between your projected expenses and any remaining income you’d have if you were unable to work will help you figure out how much disability insurance per month you’d want to buy.
Disability income insurance may cost you money up front, but it can save you much more in the long run if you experience a disability that keeps you from working for any period of time. Consider your risks, understand your options, and decide if and which type of disability insurance is right for your personal situation.