Short-Term Disability Insurance vs. Long-Term Disability Insurance

It is important to understand what qualifies for short-term disability. To qualify for short-term disability benefits, an employee must receive an evaluation from a medical professional who verifies that they are unable to do their job. Medical conditions such as pregnancy and post-partum recovery, surgery rehabilitation, and severe illness can qualify to receive benefits. Injuries that occur on the job are typically not covered by short-term disability, since employers in most states must provide workers' compensation insurance that covers these scenarios.

Preexisting conditions or intentional and foreseeable injuries (such as those inflicted during the commission of a crime) may be excluded from short-term disability coverage. In addition, most short-term disability policies do not provide benefits for employees to care for sick relatives, although workers can qualify for time off under the Family and Medical Leave Act (FMLA).

Short-term disability insurance usually covers a percentage of income over a certain period after childbirth (usually 50% to 70% of income for 6 to 8 weeks, depending on the policy). However, an employee typically can't collect short-term disability and paid family leave coverage within the same period.

Once a claim is filed, there is usually an elimination period of 1 to 14 days before an employee can begin collecting benefits. The policy terms specify the length of the waiting period, which begins on the date of the illness or injury, not the date that the claim is filed. For most disability claims, the employee must provide a signed medical form that documents the first date of the incident and provides relevant details.

While benefit periods may vary among providers, most short-term disability policies provide benefits for 3 to 6 months. Some policies, especially those connected with a long-term disability policy, may provide short-term coverage for an entire year. If an employee needs additional coverage beyond the initial short-term disability period, a long-term disability policy may be required to extend the benefits.

The amount paid out in benefits on a short-term policy is typically 40-70% of the employee's earnings for the covered event period once the elimination period has passed. The employee may opt to deduct taxes from the benefits check (if applicable) to avoid a tax liability at the end of the tax year.

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

Many companies offer short-term disability insurance as part of their benefits packages, but certain states and U.S. territories mandate it. These include:

• California: California State Disability Insurance Program
• Hawaii: Hawaii Temporary Disability Insurance
• New Jersey: New Jersey Division of Temporary Disability and Family Leave Insurance
• New York: New York Short Term Disability
• Rhode Island: Rhode Island Temporary Disability Insurance
• Puerto Rico: Puerto Rico Disability Benefits

In the states where short-term disability insurance is required by law, eligible employees typically remain employed while collecting benefits. But staying employed doesn't mean your job is legally protected. Rhode Island is the only state that builds job protection directly into its disability program. Everywhere else, employees may receive similar protection for their jobs from other laws like FMLA or state-specific protections (like the California Family Rights Act).

When employees need time off for health reasons, they might have protection under both short-term disability insurance and the Family and Medical Leave Act (FMLA). However, these are completely different types of coverage that work in different ways.

FMLA is a federal law that guarantees eligible employees up to 12 weeks of unpaid, job-protected leave for serious health conditions (your own or a family member's). Short-term disability, on the other hand, is insurance coverage that replaces part of your paycheck when you can't work due to your own illness or injury. Time off for a family member's illness is not covered under short-term disability.

Here are the key differences between the two:

• Pay During Leave: Short-term disability provides wage replacement (usually a percentage of your regular income), while FMLA leave is unpaid.
• Eligibility Requirements: FMLA's qualifications require you to work for a covered employer for at least 12 months and meet other criteria, while short-term disability may only require as little as 90 days of employment.
• Length of Coverage: FMLA guarantees up to 12 weeks of leave, but some short-term disability policies can provide benefits for up to 12 months.
• Who Is Covered: Short-term disability only covers the employee's own illness or injury, while FMLA also allows leave for family members' serious health conditions.
• Job Protection: FMLA guarantees your job will be there when you return, while short-term disability focuses on income replacement without job protection guarantees. Employers may create additional policies that provide job protection for short-term disability in some cases.

In some cases, an employee may be denied benefits if they don't meet the qualifications for short-term disability. Reasons may include:

• Lack of Medical Evidence: Employees must provide documentation from a medical professional that they are unable to do their designated job due to illness or injury. Incomplete or insufficient documentation can result in the claim being denied.
• Failure to Meet Eligibility Requirements: Short-term disability benefits can be denied if the employee doesn't meet the criteria set by the policy, such as having worked for their employer for a specified period.
• Preexisting Conditions: Some insurance companies exclude certain preexisting conditions. A claim can be denied if the employee's condition was present before being covered by the policy.
• Failure to Follow the Treatment Plan: Benefits can be denied if the employee doesn't follow the prescribed treatment plan for their medical condition.
• Lack of Disability: The insurance policy will outline which medical conditions meet the requirements for disability. A claim can be denied if the specific condition or symptoms don't match what the policy defines as eligible for benefits.
• Fraudulent Claims: Falsifying documents or misrepresenting a medical condition will result in a denied claim.

What qualifies for long-term disability insurance coverage is typically more restrictive than short-term coverage. While short-term disability usually requires proof that you’re unable to perform your current job duties, long-term disability often requires demonstrating that you’re unable to perform any job at all.

This "any occupation" standard makes meeting those long-term disability qualifications much harder. The policy will spell out exactly what conditions constitute a qualifying event, so read the fine print carefully to understand when benefits apply (and when they don't) before choosing coverage.

Common qualifying events include chronic conditions like ongoing cancer treatment, severe chronic pain, or debilitating injuries that keep someone out of work for more than six months. However, if the employee becomes eligible for other income replacement, such as Social Security Disability Insurance, their long-term disability benefits may be reduced or eliminated.

Each policy has its own requirements, but certain medical conditions commonly qualify for long-term disability benefits when they prevent someone from working. Examples include:

• Cancer Treatment: Chemotherapy, radiation, and associated recovery periods that make sustained work impossible.
• Severe Mental Health Conditions: Major depression, bipolar disorder, or anxiety disorders that make it difficult to function.
• Chronic Pain: Fibromyalgia, severe arthritis, or back injuries that limit physical abilities.
• Neurological Disorders: Multiple sclerosis, Parkinson's disease, or stroke effects that impact mobility, speech, or cognitive function.
• Heart Disease: Serious cardiovascular conditions that require ongoing treatment or limit physical activity.
• Autoimmune Diseases: Severe autoimmune conditions like lupus or rheumatoid arthritis that cause unpredictable flare-ups and fatigue.
• Severe Injuries: Spinal cord injuries, traumatic brain injuries, or amputations that permanently limit work capacity.
• Chronic Disease: Kidney disease, liver disease, and other chronic conditions that cause severe fatigue, complications, or require dialysis or transplants.

Long-term disability benefits don't start immediately after an injury or illness. They typically require a longer elimination period and will kick in after short-term disability benefits have been exhausted. If your company offers both short-term and long-term coverage through the same insurer, employees typically receive short-term benefits until they max out, then long-term coverage kicks in, even if the specified long-term waiting period is shorter.

If a short-term disability policy does not apply, the employee will need to wait the standard long-term disability elimination period, which is usually around three months before any benefits begin.

Once you have been approved for long-term disability benefits, the payments continue until you are able to return to work or you reach the maximum benefit period outlined in your policy.

Long-term disability policies commonly provide benefits for 36 months, but some may extend coverage for up to 10 years or even until retirement age. Longer coverage periods result in higher premium costs, but they also provide greater financial protection.

Long-term disability policies typically replace about 60% of the employee's pre-disability salary. The actual benefit amount is usually based on gross monthly salary, though some policies factor in bonuses or other compensation.

Most policies also set a maximum monthly benefit cap. The cap typically ranges from $5,000 to $15,000 per month, regardless of your salary. For this reason, high earners may want to consider supplemental coverage to bridge any gaps in income protection.

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 pre-tax payroll deduction, long-term disability benefits will likely be taxable. The covered employee can opt for taxes to be deducted as each benefits check is processed, or they can resolve any tax liability at the end of the tax year.

The most common elimination period for long-term disability is 90 days, but your policy will specify the exact terms.

If short-term disability coverage is available, the employee can begin receiving benefits through that policy sooner, resulting in a relatively short effective waiting period. However, when a short-term policy is unavailable, employees may have to wait the full 90-day elimination period with no income before receiving long-term benefits. Due to the lengthy waiting time, many employees opt for both short-term and long-term disability coverage if possible.

Like short-term disability, long-term disability can be denied for many reasons. Among the most common are:

• Lack of Medical Documentation: Coverage may be denied if the employee does not provide all the requested medical documentation, such as medical records, prescription records, results from medical testing, and a doctor's report detailing the condition.
• Failure to Meet Eligibility Requirements: If the condition doesn't meet the policy's requirements for long-term disability or the condition is not covered by the policy, coverage may be denied.
• Missed Deadlines: Missing deadlines for providing requested documents can result in denied coverage.
• Misunderstanding of the Work Requirements: To receive long-term disability, you must be unable to work any job, not just your current job. Not understanding this requirement may result in a claim being denied.
• Lack of Ongoing Treatment: Not consistently seeing doctors or following prescribed treatment plans may indicate to insurers that the condition isn't severe enough to require long-term disability insurance.

Long-term disability insurance is designed to replace part of your income when you can't work, but it is not a guarantee of job protection. If you have a temporary disability, your employer may hold your position for you. However, they may reserve the right to terminate your position if your absence has exceeded FMLA protections and ADA requirements do not apply.

Losing your job won't impact your disability payments if your employer offers long-term disability coverage through an insurer. However, self-insured policies, which are funded by the employer directly, typically stop payments when the job ends.

If employers offer long-term disability insurance as part of their employee benefits package, the policies must follow the Employee Retirement Income Security Act (ERISA) of 1974. This law provides safeguards around employee benefits programs, including disability insurance.