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Short term vs. long term disability insurance – how do the two policies differ?

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Short-term disability policies provide benefits that represent a portion of your monthly income over a short time period after your sick leave credits run out. Generally, these payments are made over nine to fifty two weeks or a year.

Long-term policies provide benefits that are equivalent to a portion of your monthly income after you have run out of sick leave credits and short-term disability coverage. Depending on the policy, long-term coverage may be for a number of years, say two or five years or until you reach a certain age like sixty five.

Many companies provide disability insurance coverage to their workers. If your company does not offer either short-term or long-term disability coverage, you can purchase an individual policy from insurance companies or from agents.

Overview of the short-term disability insurance policy

This policy replaces some of the income of an individual over a period of time, usually a year or less, when he cannot continue working or only does so on part-time basis as a result of a disability.

  • Benefit - In this policy, the benefit is based on an individual's pay rate during the time of disability - this can range between sixty to one hundred percent. For example, if an individual's pay rate is $4,000 monthly, and the short-term policy offers seventy percent benefit, the individual will get $2800 when he suffers from a disability.

  • Who pays for the policy - Many companies offer short-term coverage to their workers. In some cases, the company shoulders the cost of coverage, in other instances, the worker pays for coverage. Premium payments are usually based on salary, hence, those who earn more will pay more. There are employers who offer self-insured coverage - here, any benefits are paid out directly from the company's own funds.

  • Claims - Typically, an insurance company handles the approval and payout of claims. Good documentation of the medical condition is a standard requirement. It would be wise for the worker seeking a claim to work closely with his physician so that all the necessary papers are submitted on time. It is common for insurance companies and employers to seek second opinion on an individual's claim for disability benefits.

  • State administered STD programs - In California and New Jersey, they have state programs that offer short-term coverage to workers. Here, companies are either required to pay into the program or offer a similar private policy. Most states do not offer short-term disability insurance. However, they have regulations in place that govern the sale of this type of policy.

  • Individual STD policies - many insurance companies offer this policy. Terms will vary from one insurer to the other and also based your age, profession, location, income level and medical conditions to be covered.

  • What happens when short-term coverage ends? - Many STD policies provide the policyholder the option of moving into a long-term policy. Some of these policies allow for automatic transition which could be advantageous to a consumer if he is still disabled when his STD benefits run out. Some also have the option of transitioning towards Social Security Disability Insurance (see our article "Programs providing benefits for people with disabilities," there is a section there on SSDI). Consumers who anticipate the need for SSDI are advised to apply the soonest possible time.

Overview of long-term disability insurance

This policy replaces a portion of an individual's income over an extended period of time when he is unable to work or is only able to work on a part time basis because of an illness, injury or disability.

  • Benefit - The insured individual receives a set percentage of his income earned prior to his disability. That percentage may vary but generally it is set at sixty percent of an individual's wage prior to disability. For instance, an individual with a $2,000 monthly income whose policy provides 60% coverage will receive monthly benefits check amounting to $1,200. The number of years the benefits are paid out will depend on the policy which can be two years, five years or up to the age of sixty five.

  • Who pays for the LTD policy - Many companies offer LTD coverage. Some shoulder the full cost of the premium while in others the worker pays a portion of it. Workers with LTD coverage and who also have SSDI or SSI will likely see a reduction in their LTD benefits. However, the advantage of having both SSDI or SSI alongside long-term coverage is that it aids a worker to be eligible for medical assistance or MEDICARE which is not covered under a long-term disability policy.

  • Claims - Long-term policies also require proper medical documentation from a doctor. The doctor should make an explanation of the condition and provide an estimate of the length of time the individual would be unable to work. When making a claim, a waiting period will take place between the day the worker leaves the workplace and the day he actually receives his benefits. Depending on the policy, that waiting period can stretch from ninety days to one year.

  • Individual long-term disability policies - Available from many insurers, financial planners and agents. These policies tend to be more costly. Many LTD policies are guaranteed renewable or non-cancellable. Guaranteed renewable policies mean the insurance company cannot cancel the coverage as long as premiums are paid. However, the company can increase the premium amount. Non-cancellable policies, on the other hand, cannot be canceled nor the premiums increased. But these require medical examination at the onset of application.

Which one to buy: long-term or short-term disability insurance?

Consumers who cannot afford to buy both policies should consider buying long-term coverage. The idea is that many consumers can survive short-term disabilities but a long-term medical condition can spell disaster. Ask yourself the question: which would bring about greater impact to you: two months loss of income or two years loss of income? If a two-month loss worries you more, then an STD policy is what you probably need. On the other hand, if the longer time with no income is a greater concern, then get an LTD policy.

As you further ponder, think about the protection already available to you in case you get injured, disabled or fall into an illness. There is Social Security, worker's compensation, your own employer's disability insurance program, etc. Review all your insurance documents to see which areas you are not adequately covered. The idea is not to purchase policy that offers the same coverage that you have in any of these programs.

Seek the advice of your trusted insurance agent to help you determine what fits your needs best especially if you have to balance what you need with what you can afford. STD policies are generally more affordable than the long-term ones, however, they may not fit well in your overall situation.

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