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A short-term disability insurance plan pays a percentage of your income in case you are disabled and can’t work. The chance of a disability is real. Many industry sources state that the chance of disability is 1 in 4 working adults. Moreover, this probability is greater than unexpected death. While the need for disability insurance is always present, one must consider costs, especially with short-term disability insurance. In this article we discuss the feasibility, costs, and benefits with a focus on short-term disability insurance costs. We also touch upon short-term disability insurance and pregnancy, with discussion around related costs.
What Is Short-Term Disability Insurance?
Let’s say you break your hand. You are a plumber. You need your hand to work, right? The doctor says you can’t work, or you can work partially. This is a disability and likely subject to a disability insurance claim. You can’t work!
There are few different types of disability insurance, but two of the most common ones are short-term disability insurance and long-term disability insurance. The largest difference between the two is that short-term disability insurance focuses on those times you can’t work for a short period of time. Maybe you have the flu or you broke your wrist, threw out your back, etc. These situations are potentially short in duration. You are back at work in a couple of weeks or a couple of months. Long-term disability, however, focuses on those long-term situations: cancer, a severe injury, a stroke, etc.
There are other nuances, too. And, oh yes… Cost is a big difference. The costs for short-term disability insurance are usually much higher compared to that of long-term disability insurance. The main reason: there are more short-term claims. Are you getting your money’s worth when it comes to short-term disability insurance? Likely not. We will discuss that, too.
Specifics Of Short-Term Disability Insurance
All disability insurance policies have an elimination or waiting period. Many people erroneously think the waiting period is the period of time before the policy takes effect. With other policies such as supplemental health insurance products, that might be true. With disability insurance, however, that is not the case. The waiting period is the period of time before you become eligible for disability benefits. This happens when you submit an approved claim.
An example will make this clear. Let’s say the waiting period on your short-term disability policy is 0 days for an accident and 7 days for a sickness. You are diagnosed with the flu. If the doctor says you need to rest for 4 days, well, that is under the waiting period, and you aren’t eligible for a claim. Of course, if you take a turn for the worse and end up being out for two weeks, then you will have 7 days of eligible disability benefits (14 days out of work – 7 day elimination period).
The benefit period is important. After the waiting period, your benefit period begins. The benefit period is the maximum period of time you will receive benefits. For example, if you have a 6 month plan, but you are out of work for 4 months, the plan pays for 4 months. If you are out of work for 9 month, then the plan pays for a maximum of 6 months. You’ll have to support yourself for the remaining 3 months.
Your occupation also matters. A construction worker pays a higher premium compared to an accountant. The reason is that the construction worker works in a riskier occupation.
Disability Definition With Short-Term Disability Insurance
The definition of disability matters, too. You generally want own occupation definition. A policy with the own occupation definition pays benefits based on your occupation. Let’s say you are a massage therapist and hurt your fingers (and can’t work, of course). The policy pays because you can’t work as a massage therapist!
However, contrast with the any occupation definition. Back to the massage therapist example. The carrier might say you can work as a security guard. That’s the any occupation. If you can work in any job (suited by your education, experience, and skill set), benefits aren’t paid.
Really, the only time an any occupation definitely pays is in the case of a total and permanent disability, one in which you have no chance in working in any job. Outside of that, carriers have the choice to not pay your benefits. This is based on your education, experience, and skill set. But, why do you want to take that chance?
Benefits With Short-Term Disability Insurance
Let’s get to the money. In other words, what you receive for benefits if disabled.
Carriers usually will cover 60% to 66 2/3% of your weekly salary. Some plans go as high as 70%. If you get paid monthly, most carriers take your annual salary and divide by 52.
Additionally, most plans have a hard dollar cap, like $1,500 per week maximum of short-term disability benefits paid.
Benefits received from individual plans are income tax free. Employer plans paid via pre-tax salary or 100% by the employer itself are not.
This means benefits from your individual policy are not reported to the IRS. However, benefits from your group policy are reported to the IRS.
Important Concepts With Short-Term Disability Insurance Premium Costs
Here are a few things you need to understand about short-term disability insurance. We have discussed a few, but they are proportional to the costs of short-term disability insurance.
Waiting periods available from 0 days to 30 days. The higher the waiting period, the lower your costs on short-term disability insurance policy. Some policies allow a 90 day waiting period. Honestly, though, that level is long-term disability range. We’ll discuss that more in a minute.
Benefits periods available from 3 months to 24 months. The higher the benefit period, the higher the costs on your short-term disability insurance. All things being equal, of course.
People working in riskier occupations pay a higher amount compared to people working in lower-risk occupations.
Long-term disability insurance may cost less than short-term disability insurance for nearly the same monthly benefit coverage.
Higher income benefit coverage usually costs more than lower benefit coverage on short-term disability insurance.
If this feels like a see-saw, you are right. The more flexible the short-term disability insurance plan, the higher the premium costs. The more rigid, the lower the premium costs.
Where To Get Short-Term Disability Insurance?
There are really a two main places you can obtain short-term disability insurance.
(1) Through your employer (if offered), or
(2) Individually by yourself
You could also obtain short-term disability insurance through an association if you belong to one. Plans through an association are usually similar to individually purchased plans in the way of underwriting and benefits. Costs for short-term disability insurance are usually similar.
Which leads us to our next discussion. Where you purchase short-term disability insurance matters.
Honestly, (and we wouldn’t be otherwise) the best way to purchase short-term disability insurance is through your employer, if offered.
The reasons are many including, but not limited to:
(1) easier-to-none disability insurance underwriting
(2) potentially lower premium cost, and
(3) maternity benefits for women
If you have to purchase short-term disability insurance individually, either because your employer does not offer it or you are self-employed, you are likely better off saving your money and purchasing a long-term disability insurance policy.
You won’t hear that from another agency. But, we are not a typical agency.
With individually-purchased short-term disability insurance, you’ll have to go through underwriting. Probably no big deal. But, the premium costs for short-term disability insurance can be as high as the moon. Moreover, individually-purchased short-term disability insurance does not cover maternity leave for women. Well, there is one that potentially does, but we feel its costs outweigh the benefits.
If you are self-employed (with at least 1 employee) or work for a company that doesn’t offer short-term disability insurance, and want it, contact us. We work with a very affordable plan that offers maternity benefits for women. It is, in our opinion, an economical solution. However, having said that, let’s talk about the reason of this article: short-term disability insurance costs.
Short-Term Disability Insurance Costs
There are only a handful of carriers that offer short-term disability insurance. Here’s what you might spend on a policy. Is it reasonable? I don’t think so. We’ve illustrated the costs of one short-term disability insurance plan below.
Let’s say you are a 30 year old woman making $50,000 per year. You work as a hairstylist and are otherwise healthy with no health problems.
You want the best short-term disability insurance coverage of 0/7 waiting periods. Remember, this means immediate coverage for a disabling accident and a 7 day waiting period for an illness. You also want a year coverage.
You would receive about 70% of your income or $3,000 total monthly benefit.
A policy could cost you almost $290 per month.
You think you can live with a 6 month policy, but that’ll cost $260 per month.
So, you try a 3 month policy, and that’ll cost almost $190 per month.
And, I bet this cost is on the low end of carriers.
You think to yourself, I am going to spend nearly $200 per month for a three-month policy? That is $9,000 total I would receive.
That is our point. The premium costs of a short-term disability insurance policy are high. In fact, this is why we wrote that short-term disability insurance is a waste of money.
It will take you 4 years to save up $9,000 at $200 per month.
Here is a chart below, if you want to “see” the numbers. Let’s assume a 6 month benefit period. Below are the corresponding waiting periods (accident/illness, respectively). In our opinion, still high.
Remember, generally speaking, no maternity benefits on individual plans.
Alternatives For Short-Term Disability Insurance
Income replacement is extremely important. We are not saying to go without. As you can see, short-term disability insurance is expensive. You have a few alternatives.
You could purchase a policy and then save at the same time. Upon an adequate savings in case of a short-term disability, you cancel the policy.
But will that happen? As you saw, short-term disability insurance costs a lot.
You could reach out to us if you want to learn more about the plan we like to use for employers/employees/business owners. It is affordable, guaranteed issue (i.e. no underwriting), offers maternity benefits for women, and allows for pre-existing conditions. (That is something we didn’t discuss. If you had a serious illness or a moderate to severe condition, a group plan will cover you. An indiviudal plan will likely not.)
A better solution…
Purchase a long-term disability insurance policy and save the difference.
What, you ask?
A long-term disability plan covers those disabilities that will last 3 months or longer. This is where financial devastation happens: when you go without a paycheck for 6 or 9 months or even 1 year or longer. It is not the short-term illnesses or injuries, but rather the long-term illnesses or injuries. There have been many articles written about the financial impact of long-term disabilities.
So, look at the chart above. The 90 day waiting period is considered a long-term disability insurance plan. Using the 30 year old woman in our example, she could actually obtain a 2 year benefit period for around $50 per month.
You can read more about the benefits of a long-term disability insurance plan. In our example, the 30 year old can save the $209 monthly ($259 – $50) on what she was going to spend in case of any short-term disability or injury.
Short-Term Disability And Pregnancy
We receive many phone calls from women who want a short-term disability insurance policy to cover maternity leave.
With group employer plans, maternity leave is typically a covered event and covers a percentage of your income while on maternity leave.
Nearly all individual plans do not cover maternity leave, except for one possibly, and their language is a little “gray”. In other words, it is not black and white.
They state they will cover 6 weeks for a vaginal delivery and 8 weeks for caesarean. You might say to yourself, “I’m doing this. This is what I need! I don’t care about the premium I spend!“
We say, “hold on a second”. Let’s really analyze this.
First, you will need to have the policy 10 months before conception. This is generally a common condition, even with group employer plans.
Additionally, as we have said all along, the short-term disability insurance could be a waste of money.
Yes. You heard us right.
Let’s say you make $50,000 per year. You have a $3,000 per month short-term disability insurance policy. If you are on maternity leave, you will receive about $4,500 in total for a vaginal delivery.
Well, a $3,000 per month short term disability insurance policy costs $300 per month or more.
If you apply and enroll 12 months prior, you will have paid about $3,600 already in the plan before conception.
Does paying $3,600 for $4,500 or even $6,000 make sense?
No, it does not.
A better solution, however, would be to save as we described above and purchase a long-term disability insurance policy.
Pregnancy And Long-Term Disability Insurance
If an agent is pushing you to purchase a short-term disability insurance plan because of the benefits, run the numbers first and question him or her as to the reasoning. The costs of a short-term disability insurance can be crazy. Additionally, I just showed how it may not make sense for even maternity leave.
The one time it could make sense is if you have group employer plan at a low premium cost rate.
While outside the scope of this article, long-term disability insurance covers the complications of pregnancy. This can happen.
If a doctor says you need bed rest, well you can’t work, can you? This is likely a disability. Same with health conditions derived from your pregnancy that prevents you from working.
Same with after the baby is born.
I can speak from experience because my wife had pregnancy complications with our first child. Thankfully, she was on bed rest for a month, had our child, and after delivery, everything was fine.
Did we submit a claim? We did on our long-term disability insurance in case her complication carried over after our child was born. It did not. We have a waiting period of 90 days. Thankfully, we did not need to use it.
However, we had savings for any short-term needs and just kept our expenses low and reasonable. We had peace of mind knowing that if her condition carried over and prevented her from working, we would receive a benefit.
In this article, we illustrated short-term disability insurance costs. Short-term disability insurance can be expensive. I wouldn’t say you are throwing your money away, but there are better ways to protect yourself in the short-term while obtaining peace of mind with income protection. Women who want coverage for maternity benefits may be served by simply saving the premiums before conception. In effect, you will save what you could receive anyway.
Do you need our assistance? Would you like us to talk through your situation and determine what could make sense?
Unlike other agencies, we really don’t have a monetary interest. Our only interest is helping you make the right decision. If that means another solution is viable and we can’t help you, no worries. If that means you want to work with us, great! We always have your best interest, so you can have peace of mind knowing you won’t be “sold” or “pushed” into a product with us. We will gladly discuss your situation and help you any way we can. Feel free to contact us or use the form below to reach out.