Disability insurance is an important tool to protect your income in case of an illness or injury that makes it impossible for you to work. One in four 20-year-olds will experience a disability before retirement, saying coverage has become increasingly complex and knowing how to select the right plan is key. If you are thinking about coverage for short term disability (STD) or long term disability (LTD), here is everything you should know to make an informed decision.
Types of Disability Insurance
STD – Short-Term Disability Insurance
- The benefit period: Usually 3 to 6 months
- Elimination Period: Starts paying 1 to 14 days later
- Coverage: Replaces 60% to 100% of your weekly income.
Common Uses:
- Pregnancy-related conditions
- Minor injuries such as sprains or fractures
- Common mental health issues such as depression or anxiety
For instance: A young worker who is released from work for surgery might use STD to provide income during recovery.
LTD (Long-Term Disability Insurance)
- Benefit Period: Varying in duration from several years to retirement age.
- Elimination Period: Benefits begin after extended waiting period of typically 90 days or more.
- Pay Percentage: 40% to 70% of your monthly income.
Common Uses:
- Major illnesses such as cancer or heart disease
- Chronic conditions like arthritis or diabetes
- Insignificant wounds that need an extensive recuperation
For instance, an employee who is being treated for cancer may need to rely on LTD benefits to pay their bills.
Cost of Disability Insurance
Disability insurance costs vary based on several factors:
Age:
For example, a 30-year-old may pay way less in premiums than a 55-year-old for the same coverage. One reason is that disability a younger age is less likely. Premiums increase with age because the risk of disability does.
Occupation:
For example, someone working in an office environment (low-risk job) may pay less for insurance than for someone in a physically tiring job such as a construction worker that has a higher risk for injuries. Generally, riskier jobs will also lead to higher premiums.
Coverage Amount:
More income replacement benefits mean more premium. For example, you will pay more for 100 per cent income replacement than you would for 60 per cent replacement.
Benefit Period:
The longer the benefit period (i.e., how long you’ll get payments), the more expensive the premium. For example, policies that offer benefits until age 65 will be more expensive than benefits for just a few years.
Average Costs:
- Short-term disability premiums typically amount to 1% to 3% of your annual salary.
- Long-term disability insurance usually runs 1% to 4% of your salary.
STD vs. LTD: Key Differences
Here’s a quick comparison to help you understand the differences between short-term and long-term disability insurance:
| Feature | Short-Term Disability (STD) | Long-Term Disability (LTD) |
|---|---|---|
| Benefit Period | 3–6 months | Several years to retirement |
| Elimination Period | 1–14 days | 90 days or more |
| Income Replacement | 60%-100% of weekly income | 40%-70% of monthly income |
| Common Uses | Pregnancy, minor injuries | Serious illnesses, chronic conditions |
How to Choose the Best Disability Plan
Assess Your Income and Expenses:
- Assess your income needs to sustain your lifestyle during a period of disability.
- For example, if you make $60,000 a year, you might want to get a policy that pays out 70% of your salary.
Read Up on the Policy Details:
- Amount of Benefits: You want an amount that replaces enough of your income. Most policies will cover approximately 60% to 80% of your income.
- Elimination Period: The waiting period (or “elimination period”) before benefits are paid can vary from 1 day for STD to 90 days or more for LTD.
- Tip: Make sure your emergency savings can cover the elimination period.
- Benefit Period: How long will the benefits be paid by the policy? Short-term policies usually pay out over 3–6 months, while long-term policies can pay out until you hit retirement age.
Common Policy Definitions: “Own Occupation” vs “Any Occupation”:
- Own Occupation: If you’re unable to do the work that you did for a living, you may be eligible for benefits, even if you can work in another capacity.
A surgeon with an injured hand may be unable to perform surgery, but may be able to practice in another area of medicine.
- Any occupation: You can only receive benefits if you cannot work in any job for which you are reasonably suited (based on your education, training or experience).
Partial Disability Benefits:
Other LTD policies offer partial disability benefits, which means they may pay for a percentage of your lost income if you are still able to work part-time but not full-time.
Example: Partial benefits can help make up the gap if, as a result of a back injury, you can work only 20 hours a week.
Portability of Policies:
Employer-Sponsored Policies: These policies may not be portable. If you change jobs, you can lose coverage unless you get individual insurance.
Individual Policies: These are typically portable, meaning they travel with you when you switch employers.
Will Disability Benefits Be Taxed?
It is important that you understand how your disability benefits are treated for tax purposes:
- Employer-Sponsored Policies: Disability benefits paid out by employer-sponsored plans are generally taxable.
- Individual Policies: The proceeds from an individual policy are generally tax-free, as long as you paid the premiums with after-tax dollars.
Conclusion
Disability insurance helps you stay financially afloat if an illness or injury prevents you from doing your job. You can choose the coverage that’s right for you, by noting the differences between short-term and long-term coverage, given your occupation and age, along with factoring in the appropriate benefit periods and premium rates.
Review your disability insurance options today, and consider consulting with a financial advisor to ensure you have enough coverage. Disability insurance is a key part of your financial future protection.
