Short-Term Disability Insurance

What Is Short-Term Disability Insurance?

Short-term disability insurance replaces a portion of a person’s income due to a temporary disability. Disability insurance is not health insurance and does not cover medical bills associated with a disability. Rather, disability insurance protects your paycheck in case you become sick or injured and cannot work.

There are two types of disability insurance: short-term and long-term. Short-term disability insurance covers illnesses or injuries that are expected to resolve within a year. If the disability results in someone being unable to work for multiple years or even permanently, long-term disability insurance coverage provides benefits for that extended period.

How It Works

Short-term disability insurance works by paying out a monthly benefit based on a percentage of the income you’re losing while disabled. Once you file a claim for disability benefits, you’ll have to go through a waiting period called the elimination period before your benefits can begin.

For most short-term disability policies, the elimination period is about a week. “Think of it as a deductible, but in time instead of money,” said Chris Castanes, an insurance agent and president of Surf Financial Brokers. Castanes added that the longer the elimination period is, the less the premiums will cost.

To receive your disability benefits, you’ll likely have to prove that you are unable to work due to a medical condition. Your doctor will have to provide evidence such as medical records as proof of your disability.

Although short-term disability insurance is often provided by employers, it is not the same as workers’ compensation insurance. Unlike workers’ comp, short-term disability insurance pays benefits for injuries or illnesses that don’t result from your job.

How Long It Lasts

Short-term disability benefits can last from a few weeks up to a full year. Data from the Bureau of Labor Statistics shows that the median length of short-term disability coverage is 26 weeks.

However, different providers and plans might have different limits on how long you can claim benefits. When shopping for a short-term disability policy, the benefit period is an important feature to consider.

The condition you’re claiming benefits for can also impact how long you’ll receive benefits. Insurance providers usually have estimates of how long recovering from a specific illness or injury will take. They use these estimates to determine what is a reasonable amount of time for you to receive benefits.

What It Pays

When you receive benefits from your short-term disability policy, you’ll be paid a percentage of your normal monthly income. A short-term policy will usually replace more than a long-term policy because the benefit period is shorter.

Most short-term disability insurance replaces between 40% and 70% of your salary, with some policies paying up to 80%. The larger the percentage of income replaced, the higher your premium is likely to be.

If you don’t have sufficient emergency savings or access to a state disability insurance program, short-term disability insurance can be an important addition to a comprehensive financial security plan.

— Daniel J. Adams, MBA, CFP®, CLU®

Conditions That Qualify for Short-Term Disability Benefits

Policyholders can claim short-term disability benefits for temporary illnesses and injuries that are expected to resolve within a year. Common conditions that qualify for benefits include recovering from surgery or an injury from an accident.

However, these incidents don’t make up most disability claims, said Castanes. “When people think of disability insurance, they think of it paying for car accidents and other injuries, however the vast majority of claims are actually for illnesses such as cancer.”

Many people also use their short-term disability benefits during or after pregnancy. Coverage for pregnancy and parental leave can vary by policy, but many providers will have some amount of coverage for an uncomplicated pregnancy with the possibility of extended coverage if your doctor documents complications that require additional benefits.

Finally, policyholders dealing with mental illness can qualify for benefits under some short-term disability coverage. “Mental health issues such as depression and anxiety are often covered depending on the terms of the policy,” said Linda Chavez, a licensed insurance agent and CEO of Seniors Life Insurance Finder.

Which States Require Short-Term Disability Insurance?

Five states have short-term disability insurance requirements for employers: California, Hawaii, New Jersey, New York and Rhode Island.

In California, more than 18 million workers are enrolled in the State Disability Insurance (SDI) program. Workers who file eligible claims can receive benefits of about 60% to 70% of their regular wages. The benefits can last for up to 52 weeks.

Employers in Hawaii can provide short-term disability benefits through the state’s Temporary Disability Insurance plan. The cost of this coverage can either be funded entirely by the employer or split equally with eligible employees, but the employee’s contribution cannot exceed 0.5% of their weekly wages.

New Jersey’s Temporary Disability Insurance program pays claimants up to 85% of their average weekly wage up to a limit. In 2023, the maximum weekly benefit rate is $1,025 per week. The insurance is funded through payroll deductions and employer contributions.

New York requires employers to provide short-term disability coverage to employees. The benefits can be covered through the employer’s insurance carrier or the state’s Disability and Paid Family Leave Benefits. Disability benefits are paid for a maximum of 26 weeks and cannot exceed the maximum benefit of $170 per week.

Rhode Island was the first state to provide a Temporary Disability Insurance program for its working citizens. The TDI plan pays benefits for up to 30 weeks, and the maximum benefit amount is $1,007 per week. Rhode Island’s insurance program also allows claimants to collect partial TDI benefits if they are able to work part time while disabled.

Short-Term Disability Insurance vs. Temporary Disability Insurance

The terms “short-term disability insurance” and “temporary disability insurance” refer to very similar programs. Functionally, these two types of insurance work the same, replacing lost income for workers who become temporarily disabled.

The main difference between short-term disability and temporary disability insurance is where the insurance coverage comes from. Short-term disability usually refers to a policy that’s purchased from an insurance company.

Temporary disability insurance, on the other hand, refers to the government-mandated insurance programs previously mentioned. Only a few states have these temporary disability insurance programs, which are usually funded through payroll deductions and automatically enroll all eligible workers in the plan.

Alternatives to Short-Term Disability

If you live in one of the five states with a state-required temporary disability insurance program, you could use that coverage as an alternative to purchasing a short-term disability policy. However, workers not in those states have other options.

Savings

Because short-term disability benefits typically only last for a few months, many people choose to insure themselves by building a robust emergency fund.

The conventional wisdom is that emergency funds should cover between three and six months of expenses, including rent, groceries and utilities. If you can save enough to build a strong reserve of savings, you’ll have funds to tap into if you become disabled and cannot work for a few months.

Social Security Disability Income

The federal government’s Social Security Disability Income (SSDI) program provides benefits to disabled individuals and their family members. However, this program should not be considered an alternative to short-term disability insurance coverage.

To collect SSDI benefits, you must have a medical condition that is “expected to last at least one year or result in death.” For this reason, SSDI is not likely to be helpful for temporary disabilities such as recovering from surgery or pregnancy.