If an illness or injury prevents you from working, your income stream is no longer streaming…it is at a full stop. This can put you at risk of being unable to pay your bills, such as mortgage payments, car payments, credit card payments, groceries, and so on.
Many people assume workers’ compensation will fill the income gap created by a disability; however, workers’ compensation only pays if you are injured at work. Social Security disability payments can sometimes be an option to help your family make ends meet during a disability. Unfortunately, proving eligibility for Social Security benefits can be difficult and even if you are able to establish that you are entitled to them, they average only $1,234 per month.
This is where disability income insurance comes in. Various forms of disability insurance are designed to help financially bridge the gap until you can work again.
Short-term disability insurance is an insurance policy that pays a benefit to replace a portion of your salary in the event you experience a non-work related injury or illness that renders you unable to work for a period of time.
Short-term versus long-term disability insurance
Long-term disability income insurance is out there as well but serves a completely different purpose. Specifically, the primary differences between long-term and short-term disability insurance are coverage length and coverage amount.
Take a look:
- Long-term disability insurance
- Generally replaces 40% to 60% of base salary
- Coverage stays in place until disability ends or in some cases, after a set number of years or when retirement begins
- Typically a 90-day waiting period after onset of disability before benefits begin
- Short-term disability insurance
- Generally replaces 60% to 70% of base salary
- Length of coverage varies by policy but typically between a few months and one year
- Typically a short waiting period of two weeks from onset of disability before benefits begin
Long-term disability insurance makes sense for some people and 41% of American employers offer long-term disability insurance as a benefit. But here, we’ll focus on short-term disability insurance and when it might be a good idea.
Insurance is all about managing risk, right? The first step to understanding short-term disability insurance is to understand what kind of risk we are talking about. According to the Social Security Administration, if you are in your 20s, chances are more than 1-in-4 that you will experience a disability that keeps you out of work for a period of time before you retire. Despite those rather high odds, LIMRA reports that only 20% of people carry short-term or long-term disability coverage.
The top causes of disability are not serious accidents as some people think. They are more often ongoing conditions such as back or muscle pain. Pregnancy is also a short-term disability.
Another disability misconception is that only people with very dangerous jobs, such as loggers or commercial fishermen, need to worry about becoming disabled. Nope. Even a desk jockey has a risk of disability.
Let’s dig into who might want to take a look at making short-term disability coverage a component of their financial security plan.
Who should consider short-term disability insurance?
When you really think about the potential financial impact of a disability, even one that only lasts for a relatively short time, the value of short-term disability insurance becomes pretty clear. While not for everyone, this type of insurance can be a lifesaver for the following kinds of people.
Your state and employer do not provide short-term disability insurance
Most people with short-term disability insurance get it through their employer. A few states either provide or require employers to provide short-term disability insurance. If you live in California, Hawaii, New Jersey, New York, or Rhode Island, you are automatically covered when it comes to short-term disability insurance.
Even if you don’t live in one of those states, short-term disability insurance is often provided voluntarily or offered as an add-on for employees who want to purchase it. Short-term disability insurance may not make the cut for smaller employers that are struggling to provide other basic employee benefits.
Don’t assume your employer has you covered. Ask for details and find out for sure.
Being self-employed has loads of advantages: flexibility of schedule, no commuting, ability to self-direct your career, and so on. And don’t even get me started on the joy of shedding a business suit and heels in favor of jeans and a favorite tee shirt. But, as with most things, there are two sides to the story.
One disadvantage of being self-employed is in its very name: self. As in, you are doing all of this yourself. There is no safety net. This means:
- No employer match on your 401(k)
- No employer-provided health insurance
- No paid vacation or holidays
- No short-term disability insurance
If you’re going it alone as a gig employee or otherwise doing your own thing employment-wise, short-term disability insurance can help you keep your head above financial water.
You want gap coverage
If you’ve got long-term disability insurance, it can be a terrific financial lifeline. But you won’t see any benefits for a period of weeks or months. Would you be able to meet your financial obligations without income for that long? Ninety days seems like no time at all…unless you are without income waiting for your long-term disability insurance coverage to kick in. A short-term disability insurance policy can be a great way to cover that gap period.
Your savings account is low (or you don’t want to dip in)
If you do not have disability insurance, you will likely need to turn to your own savings to cover the period for which you are disabled. A study done by Haven Life revealed that more than half of those surveyed had $5,000 or less in savings. If you are in this boat or otherwise could not cover a period of short-term disability with your savings on hand, short-term disability insurance may be a good option.
If you are considering opting out of disability insurance and relying on savings, do the math and determine how long you could get by the amount you have put away for a rainy day. It might not be as long as you think. In addition, you are of course draining that rainy day fund and will need to build it back up when you return to work. This could leave your family vulnerable during that “in-between” period.
After running the numbers, you may decide to rely on your savings to provide income replacement during a period of disability. If you opt to go this route, which is essentially self-insuring the risk, consider whether holding a disability insurance policy during your savings build-up period makes sense for you.
Your family depends on you
No matter the makeup of your family, a disability for one of the breadwinners can be financially devastating. Unless you have another source of income sufficient to support your family, if your income stops because of disability, you could deplete your emergency savings or might not be able to keep afloat. When the ones you love the most are counting on you for financial support, having coverage in place can bring you tremendous peace of mind.
Is short-term disability insurance worth it?
Short-term disability can be a financial safety net for your family when you need it most. If you work for a living and your household depends on your income, short-term disability could be worth the expense, if you can afford the premium.
Your earning ability is valuable. In fact, it could be your most valuable asset. Protecting it with short-term disability insurance can be the key to getting through a rough spot.
The bottom line is that if you happen to become disabled, your ability to take care of your family could be compromised. A review now of the short-term disability insurance options that are available and how they might fit into your family’s financial game plan could truly make the difference in the future when you need it the most.