Disability insurance is an important financial planning tool and understanding long-term vs. short-term disability insurance types, prices, and coverage must be evaluated before purchase. Frequently asked questions about disability insurance include, “What’s the difference between long-term vs. short-term disability insurance?” and “What does disability insurance cover, at what cost?”
Disability insurance supplies income when the insured can’t work due to injury or illness. The disability insurance policy is written for the length of time after disability and includes the elimination period, or the length of time and benefits payment the policy will pay out.
Long-Term vs. Short-Term Disability Insurance
Short-term disability insurance typically covers the disability term of twelve months or less. A long-term disability insurance policy can cover the insured’s needs for a lifetime. Other factors, such as the insured’s savings and capital base, may help the client to decide what type of private disability insurance policy he or she needs.
Several states offer short-term disability insurance to resident workers. New York, Hawaii, Rhode Island, California, and New Jersey residents don’t need to purchase private short-term disability policies through an insurance agent or employer.
Job or Occupation of the Insured
Physical labor on the job can increase the risk of job-related disability. If you’re an office worker and use little physical effort to perform your work duties, it’s still possible to come to work with a broken arm. However, if you’re a roofer or bricklayer, you must have the use of both arms to perform your occupation.
Disability insurance costs more for the physical laborer. According to the Wall Street Journal, anyone performing physical labor should purchase a minimum six-month short-term disability policy (unless he or she is a resident of the states that provide short-term disability insurance). According to the U.S. Bureau of Labor Statistics (BLS), the physical laborer is twice as likely to become disabled for six months or less than the white collar worker.
Costs of Disability Insurance
Private disability insurance premiums are expensive but, for some workers, it may make good sense. For instance, the self-employed plumbing contractor must perform physical labor and, if injured, he or she can’t earn an income. According to the National Insurance Association, the average cost of private short-term disability insurance is one to three percent of annual earnings. Older workers typically pay higher premiums:
- The average thirty year old man pays about USD 450 a year for short-term disability premiums.
- At 45, the average insured pays more than USD 5,000 for private short-term disability insurance.
- If the insured earns USD 50,000 per year, the cost of private disability premiums depend on the insured’s age and job.
In comparison, if the worker earns minimum wage, paying disability premiums may be difficult even if it makes good financial sense for him or her to do so.
According to BLS, about 40 percent of employees had access to short-term disability insurance in 2014:
- All workers paid an average cost of six cents per hour worked.
- Over the same period, about 34 percent of all workers had access to employer-offered long-term disability insurance and paid about five cents per hour worked.
- More managers and professionals had access to short-term and long-term disability insurance than service workers, according to Employer Cost for Employee Compensation (ECEC).
Capital Access and Savings
The amount of savings the worker has can help him or her to decide whether private or employer-offered disability insurance is a must. For instance, if you have an emergency fund with at least six months of living expenses at your disposal, you probably don’t need short-term disability insurance.
A long-term disability insurance policy (with a six-month exclusion period) could help the worker to withstand the financial impact of a long-term disability. After his or her short-term emergency fund savings are exhausted, the long-term policy would become effective.
In contrast, the worker without savings or capital access living paycheck to paycheck might benefit more from a short-term disability insurance policy. His or her immediate cash on hand will be quickly assumed.
Medical specialists, surgeons, and other professionals should purchase private long-term disability insurance with or without a short-term disability policy:
- Social Security Disability claimants are eligible for benefits only when and if they cannot work at any type of job.
- In an own occupation private policy, the practitioner is paid when he or she can’t perform a specific specialty occupation.
- For example, if a neurosurgeon loses an index finger, he can teach medical students but can’t operate on patients.
- SSDI won’t pay the surgeon for his disability but a private own occupation policy will.
Average Disability Term
According to the National Institute on Disability & Rehabilitation Research, the average disability claim is 90 days or less. However, a disability that extends longer than three months extends the average disability claim to more than three years.
The 1992 study shows that, if the disability extends to two or three years, about half of disabled people are still disabled at five years.
According to SSA, only about 30 percent of first-time SSDI applications are approved for benefits (2011). The need for private or employer-offered long-term disability insurance remains an essential planning tool for many Americans.
Social Security Disability Income and Long-Term Disability
However, if a worker becomes permanently disabled, Social Security Disability Income (SSDI) can protect the worker over the long-term. Each U.S. worker paying Social Security taxes may be eligible for SSDI payments if he or she is disabled.
The disabled worker must submit the SSDI application to Social Security Administration. If eligible and approved for these benefits SSA pays SSDI benefits after the worker is disabled for six full months.
Since all workers paying Social Security taxes are potentially eligible for SSDI, Social Security Administration applies the same requirements for individuals in non-specialized and specific occupations.