Short-term disability insurance is the most overlooked insurance, but it's especially important if you're injured and out of work for months.

Short-term disability insurance is one of those benefits that we think of as being on the second tier of the menu. Most people are primarily concerned with the Big Two of employee benefits – health insurance and retirement.

But if you’ve never paid attention to it before, find out exactly what kind of disability insurance you have, or if you’re even covered at all. And if you’re not, take steps to correct the situation.

Short-term disability is one of those benefits that you need to have in place before an event takes place. Once it does, it’ll be too late.

What is short-term disability insurance?

Short-term disability insurance is coverage that will partially replace wages lost due to disability. Plans can be provided by your employer, or you can purchase your own coverage. Like all types of insurance, there are different benefit levels, as well as different options and exclusions.

A typical short-term disability insurance policy will usually cover 60 percent of your salary. There’ll probably also be a dollar limit, typically no more than $5,000 per month. Exactly how much benefit you can receive will depend on how much you (or your employer) want to pay for the premium.

Short-term disability insurance provides benefits for a period of disability lasting between three and six months. Again, the life of the benefit term will be determined by the premium you pay. The longer the benefit term, the higher the premium will be.

“Own occupation” vs. “any occupation” provisions

This might very well be the most important distinction that exists when it comes to disability insurance. These two provisions relate to the general requirements under which a disability policy will pay you benefits.

Own occupation

This means that the policy will pay you benefits as long as you’re unable to perform your duties in your current occupation. It won’t matter if say, you are an accountant, but you could work as a security guard. The policy will pay benefits because you are unable to work as an accountant.

Any occupation

This means the insurance company will only pay benefits if you’re unable to work in any capacity. It’s a reverse of the above example: If you’re an accountant and you’re injured, but you could work as a security guard, the insurance company will not pay benefits.

Most people would assume that “any” is better than “own”, since it sounds open-ended, but rest assured that the “any” occupation provision will work against you. In fact, unless you’re facing a situation involving complete disability, it’s unlikely that you’ll get any benefits whatsoever from an any occupation policy.

Short-term disability tax considerations

The benefits can either be taxable or tax-free. It all depends on who pays the premiums. If you pay the premiums yourself, then the benefits may be tax-free. But if your employer pays the premium for you, then the benefits will be taxable when received.

Even if you do pay the premiums yourself, they might still be taxable. If you pay the premiums with after-tax dollars, meaning you don’t get a tax deduction on the premium, then the benefits you receive will be tax-free. But if you pay the premiums out of pre-tax dollars, meaning that you get a tax deduction for paying the premium, then the benefits will be taxable when received.

Factors that affect a short-term disability premium

The amount of your benefit, the life of the benefit term, and “own” vs. “any” provisions are major factors that affect how much your premium will be. But it will also be determined by your occupation.

Some professions are known to be more hazardous than others, and more likely to result in disability. Premiums will be higher in those fields.

For example, a firefighter is a more hazardous occupation than being an accountant. The likelihood of a disabling injury is much higher for a firefighter than it is for an accountant The premium will be higher as a result.

Premium amounts can vary widely. If you’re purchasing a private plan, you can expect to pay one to three percent of your annual income.

Short-term disability insurance vs. long-term disability insurance

There are two types of disability insurance policies, short-term and long-term. In the case of long-term disability insurance, benefits will be paid for longer terms. The term can be as short as two years, or as long as it takes to reach retirement age (generally 65).

A major reason short-term disability is needed is to cover the waiting period required for long-term disability policies. Those waiting periods are generally between three months and six months, which is nicely covered by a short-term disability policy.

As is the case with short-term disability insurance, the waiting period for long-term disability also serves to reduce the cost of the policy. And it generally takes several months for an insurance company to determine that a disabling event is in fact long-term.

Long-term disability is often available as an employee benefit. It can also be purchased as a private policy.

Social Security disability insurance

Apart from long-term disability policies, virtually every working American is eligible for benefits under Social Security Disability Insurance (SSDI). While this would seem to eliminate the need for having disability insurance, there are some complications.

For one thing, SSDI is not easy to qualify for. They have strict guidelines for benefits eligibility, and not everyone qualifies in all events. If you do qualify, it can takes months to receive your benefits.

And finally, SSDI benefits are on the low side. For 2017, the maximum benefit is $2,687 per month, but the average is just $1,171 per month. If you earn, say $5,000 or more per month, the benefit probably won’t pay your bills.

This is why people maintain both short-term and long-term disability policies, either through their employers or through their own private policies.

When do you need short-term disability insurance?

Coverage is not offered by your employer

Though both long-term and short-term disability insurance are available through many employers, you should never assume that they are. As I wrote at the beginning, most people are most concerned with health insurance and retirement plans. Disability insurance is often considered to be a throw-away benefit, especially if you’re young.

Never assume that you have short-term disability insurance at work. Find out if you do, and what kind of benefit provisions you have. If not, a private plan is an outstanding idea.

You have long-term disability, but no short-term coverage

It’s possible that you have long-term disability coverage through your employer, but not short-term. Though most employers will offer the two policies in tandem, once again you should never assume this to be the case.

Even if you do have long-term disability coverage, you should still look into adding a short-term disability insurance policy to the mix. If the long-term policy has a waiting provision of six months, you could easily drain all of your liquid assets before you were even eligible for benefits.

You’re self-employed

Self-employed? The only insurance you’ll have is what you purchase yourself. At a minimum, you should have short-term disability insurance. That will cover most of the events that are likely to cause you to be unable to work, including major illnesses.

If you can’t afford to have a long-term disability insurance policy, you’ll have to rely on SSDI.

You’re an independent contractor

A lot of people fall into the independent contractor category these days. But one of the most basic elements of independent contractor status is specifically a lack of benefits.

Since your income as an independent contractor depends entirely on your ability to perform services for the employer, having at least short-term disability insurance in place is critical. Again, it will cover you for the most common forms of disability, that will generally last only a few months. And like the self-employed, you can rely on SSDI for long-term disability.

Summary

Short-term disability insurance may seem like something you’ll never use, but if you do get injured and can’t work, having insurance will be a life saver.

Talk to your employer and find out if they offer short-term disability insurance, or find your own. Either way, you should seriously consider having it.

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About the author

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Since 2009, Kevin Mercadante has been sharing his journey from a washed-up mortgage loan officer emerging from the Financial Meltdown as a contract/self-employed “slash worker” – accountant/blogger/freelance web content writer – on Out of Your Rut.com. He offers career strategies, from dealing with under-employment to transitioning into self-employment, and provides “Alt-retirement strategies” for the vast majority who won’t retire to the beach as millionaires. He also frequently discusses the big-picture trends that are putting the squeeze on the bottom 90%, offering work-arounds and expense cutting tips to help readers carve out more money to save in their budgets – a.k.a., breaking the “savings barrier” and transitioning from debtor to saver. He’s a regular contributor/staff writer for as many as a dozen financial blogs and websites, including Money Under 30, Investor Junkie and The Dough Roller.