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Short vs. Long-Term Disability Insurance

Disability insurance can come in two formats: short- and long-term disability. Learn the difference between the two, what qualifies for them, and how long each lasts.
Short vs. Long-Term Disability Insurance

When it comes to voluntary benefits, knowing what to offer your employees may be challenging. For your employees, understanding the right coverage types and levels can be overwhelming; in the event that they experience a disability, they may not have adequate coverage in place.

To ensure you and your employees have adequate protection in place when such incidents occur, it's important to explore the differences between short-term and long-term disability.

What is short-term disability?

Short-term disability is a type of voluntary insurance that replaces part or all of an employee's income in the event of a temporary disability. Typically, this insurance policy is paid in full or in part by the employer, and the employee must be unable, due to illness or injury, to perform their normal work duties to receive the insurance benefits.

How does short-term disability insurance work?

Short-term disability is designed to protect both the employee and the employer if the worker can no longer do their job as a result of illness or injury. When a qualifying event happens, an employee can file a claim with a disability insurance company to receive the amount of income specified in the policy benefits. This helps to protect the employee from financial hardship during the recovery period by providing temporary income for routine expenses.

Short-term disability also benefits the employer. The policy helps to protect the employer's investment in a valuable employee by ensuring the employee can remain financially stable long enough to recover and return to work. Since disability benefits are paid by the insurance company and not the employer, this also provides financial flexibility that would allow the company to pay for a temporary replacement without incurring excessive labor costs.

Some states, such as California and New York, require employers to provide short-term disability coverage to all employees, along with other employee benefits required by law. The state may provide a state-sponsored disability plan, or employers can purchase one through a private carrier. In these states, there are many rules that regulate short-term disability, so employers should carefully review any regulations that may apply.

What qualifies for short-term disability?

To qualify for short-term disability benefits, an employee must be unable to do their job, as deemed by a medical professional. Medical conditions that prevent an employee from working for several weeks to months, such as pregnancy, surgery rehabilitation, or severe illness, can qualify to receive benefits. Since employers in most states must legally provide workers' compensation insurance to all employees, any injuries incurred on the job are typically not eligible for short-term disability.

When do short-term disability benefits start?

Once a claim is filed, there's usually a short waiting period of one to 14 days before an employee can begin collecting benefits from the policy. The waiting period will be specified in the policy terms during signup. For most disability claims, the employee must provide a medical form signed by a doctor that details the illness or injury. The form asks for the first date of illness or injury, and this date is typically used as the beginning of the waiting period.

How long do benefits last?

While benefit periods may vary across different providers, most short-term disability policies provide benefits for three to six months. If an employee needs additional coverage beyond the initial short-term disability period, a long-term disability policy may supplement benefits.

Is short-term disability taxable?

Income from a short-term disability policy may be taxable, depending on whether it was funded with pretax or post-tax income. Most employer-sponsored disability plans are paid on a pretax basis either directly from the employer or through payroll deduction from the employee (or a combination of both). In these cases, the insurance proceeds would be taxable, since taxes were not paid on the income used to fund the policy. In contrast, if an employee purchases a private disability policy outside of the employer's benefits plan, this would be purchased with post-tax income, and the disability benefits would not be taxable.

What is long-term disability?

Long-term disability is an insurance plan that often works in tandem with short-term disability to provide income for long-term illnesses and injuries. Once short-term disability benefits are exhausted, a long-term disability policy continues to provide the employee with some income until they can return to work.

How does long-term disability insurance work?

Long-term disability works in much the same way as short-term disability. Once a plan is in place, the employee must provide medical proof of a qualifying illness or injury lasting beyond the long-term disability waiting period. Once the burden of proof has been met, the employee can begin receiving the benefits specified in the policy. Benefits will continue until the employee is medically cleared to return to work or has exhausted the policy benefits.

What qualifies for long-term disability?

The qualifications for long-term disability are usually more stringent than those for short-term disability. With short-term disability, benefits can be awarded if the employee is unable to do their job. With long-term disability, benefits will typically only be awarded if the employee is unable to do any job. Qualifying events may include chronic pain, cancer treatments, or debilitating illness or injury lasting more than 26 weeks.

When do long-term disability benefits start?

Long-term disability benefits begin after the specified waiting period and any coordinated short-term disability benefits have been exhausted. If an employer offers both short-term and long-term disability plans through a single insurance provider, the provider will usually pay out under the short-term disability plan to its maximum before applying long-term disability payments, even if the specified long-term waiting period is shorter. For cases where a short-term disability policy may not apply, the standard waiting period for long-term disability policies is three months.

How long do benefits last?

Once long-term disability benefits have been approved, an employee can continue to receive benefits for the length of the policy term or until they return to work. Most long-term disability plans provide coverage for 36 months, although some plans can provide coverage for up to 10 years.

Is long-term disability taxable?

As with short-term disability benefits, long-term disability benefits may be taxable depending on how the policy is funded. If the policy is paid through pretax payroll deduction, the employee will likely be liable for income taxes on any and all long-term disability benefits.

Short-term vs. long-term disability insurance

The main difference between short-term and long-term disability insurance is the length of coverage. Short-term policies are designed to provide benefits almost immediately for temporary disabilities, while long-term policies have a considerably longer waiting period, but they provide coverage over a longer term for more serious illnesses or injuries. Since insurance companies may potentially be providing benefits for years with a long-term policy, the medical requirements are also more rigorous: The employee must be unable to perform nearly any kind of work to qualify for benefits.

Although illnesses and injuries can't be predicted, they're likely to affect your workplace at some point in the future. For comprehensive protection, employers may consider offering a combination of both short-term and long-term disability insurance to employees. These policies are an important complement to any group health insurance plan and help to minimize the impact of debilitating illnesses and injuries on both your employees and your business.



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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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