Key Features of Short and Long Term Disability Insurance

Short and long term disability insurance are income replacement plans.  Basically, these policies will pay you a percentage of your regular salary if you can't work for an extended period of time due to illness or injury.  As indicated by the plan names, short and long term disability insurance differ primarily in the lengths of the benefit periods.

Short term disability (STD) plans usually pay benefits for three to six months, depending on the terms of the policy.  The percentage of your salary replaced can vary a lot - anywhere from 60% to 90% - although the lower end of the range is more common.

Long term disability (LTD) is used for situations when you can't work for much longer time periods or are permanently disabled.  Benefits usually start six months after the first time you're out of work, but it might also be a year.  The most common income replacement levels are 60% and 67%.

It's a good idea to coordinate your disability policies so the LTD kicks in when the STD ends. Group plans are almost always designed in this manner, often in conjunction with Family and Medical Leave and sick leave policies.

If you have a job, your employer might offer either or both disability plans.  If you work for yourself, you can purchase individual policies on the open market from one of the many insurance companies that sell them.  Given the competition in the market, make sure you get multiple quotes.

With employment based benefits, It's important to understand who pays the premiums - you or your employer - and what the rules are for electing the coverage.  The plans can be structured in various ways, such as

• Employer pays for both short and long term coverage
• Employer pays for one insurance policy (usually LTD) and employees can elect to buy the other
• Employer makes both STD and LTD available to purchase
• Employer pays for a base benefit level, say 60% income replacement, and allows employees to pay for supplemental coverage to increase the replacement level by another 7% to 10%.

If you must elect and pay for the coverage, check the policy upon hire to see if you must make the election when you first start or if you'll have an opportunity to pick up the coverage later such as during Open Enrollment. If you have only the one chance when you first start to elect disability insurance, you should seriously consider taking it.

A few states - California, for example - have their own short term disability programs for workers. Many states regulate disability insurance policies that can be sold there. If you have any questions about the rules and benefits available in your location, check with your state insurance board.

If your employer pays for short and long term disability insurance, you really don't have any decisions to make.  But you should still make sure you understand how the policies work as part of your overall financial plan.

Since STD and LTD are income replacement policies, your decision to buy the coverage really comes down to your personal situation and the degree to which the loss of income from active work would affect your ability to pay the bills.  Don't forget that in the case of a long term illness or injury, you might also qualify for Social Security Disability Insurance (SSDI).

Do you have significant savings or multiple streams of income that you can rely on in the case of serious illness or injury?  Disability insurance might not be a critical part of your financial plan.

But if your savings can't support you until SSDI kicks in or your job accounts for most of your household earnings, you should seriously consider at least basic policies.  Group plans through an employer are very affordable, and the premiums will be deducted from your paycheck.  But even individual policies are also reasonably priced unless you already have a serious health condition.  Be aware that you might have to undergo medical underwriting and provide information about your profession.

Run the numbers. Total up your savings and your income sources. Then do the research to find out what the coverage will cost. In many cases you will find the premiums are worth the peace of mind.