What is Short Term Disability Insurance?
Short term disability insurance provides payments directly to policyholders in the event that a covered illness or injury prevents them from working. This type of coverage is typically classified as a voluntary benefit when offered through an employer, but such coverage is also regularly offered through professional organizations and as individual policies.
Unlike many voluntary insurance policies for which the amount paid to policyholders is based on the type and severity of illness or injury that was incurred, short term disability insurance policies pay out claims as a percentage of the policyholder’s income.
Depending on the cost of a given policy’s monthly premium, in addition to other factors like the age and occupation of the policyholder, short term disability policies often pay out between 50% and 70% of the policyholder’s salary for a set amount of time as outlined in the policy.
To that point, for further clarification, the “short term” in short term disability refers not to the term of the illness or injury, but instead it refers to the term in which the policy will continue paying a percentage of the policyholder’s salary or wages.
Usually, short term disability policies will pay out claims for between 3 to 6 months, with some policies offering coverage for up to a year.
What Short Term Disability Insurance Is NOT
As the name implies, there is more than one type of disability insurance. Otherwise, the “short-term” qualification of short term disability insurance would be unnecessary. As it happens, there are also long term disability insurance policies as well as temporary disability insurance policies, which should not be confused with the short-term variety.
Long term disability insurance works in a similar manner to short term disability coverage in that it pays out claims as a percentage of the policyholder’s earnings, though that percentage tends to be somewhat smaller than in short term disability policies.
Also, unlike short term disability policies that only pay out claims for a predetermined and relatively short term once a claim has been filed, long term disability policies will often pay out claims for the duration of the claimable illness or injury, or until the policyholder retires or reaches a predetermined age as outlined in the policy.
Temporary disability coverage operates in a manner much more similar to short term disability insurance, but is only available in a small number of states.
Whether or not your company will qualify for temporary disability coverage depends upon where your company and employees are located, where the company incorporated, and where it primarily conducts business.
How Does Short Term Disability Insurance Work?
After providing some information like a prospective policyholder’s age, medical history, and relevant risk factors for the actuarial calculation, the process for obtaining short term disability coverage is fairly simple and straightforward.
Whether seeking coverage through an employer, a professional organization, or independently, the next step will be to determine how much coverage you’ll need in the event that an illness or injury keeps you away from your source of employment.
Thankfully, because short term disability insurance claims are paid out as a percentage of policyholders’ earnings, it can be a fairly easy calculation to determine what kind of financial support a policyholder will require in order to maintain their financial obligations during their period of infirmity.
That said, however, it is impossible to determine in advance how long one is likely to be away from work for an unknown-at-the-time illness or injury, which is why coupling short term disability insurance with long term disability insurance can be a wise move for more comprehensive protection.
Further, some injuries may not be significant enough to keep a policyholder away from work entirely and may still allow for part time work or may even allow a policy holder to apply their occupational skills to another job on a full-time basis during recovery.
Because of these uncertainties, it is important to know in advance how a given policy addresses such situations in order to best prepare for the occurrence of illness or injury with less absolute impact on a prospective policyholder’s earning capability.
All that said, once a covered event happens, a claim can be filed immediately and payout can be expected within a matter of a couple weeks under most circumstances. This quick turnaround for claims payments is another way in which short term disability insurance can be differentiated from long term disability insurance policies, which often require a preset waiting period after a claimable event has happened before claims can be filed.
Why You Should Consider Adding Short Term Disability Insurance to Your Portfolio
It is human nature to underestimate the probability that undesirable events will occur. However, the harsh truth is that our near universal wish to keep such potential occurrences out of mind is not only an entirely ineffective way of avoiding such occurrences, but also our reluctance to think about these things in advance often leaves us woefully unprepared for them when they do happen.
Accordingly, when initially entering the workforce or just starting a new job, people are often naturally inclined to consider their career goals in a larger sense. On the other hand, however, not nearly as many of those people will contemplate the fact that nearly 25% of all people will find themselves unable to work for a significant period of time as a result of an illness, injury, or other medically claimable condition at some point in their career before they reach retirement.
That fact, coupled with the small percentage of the workforce who can afford to be out of work for more than a very short period of time, makes short term disability insurance a very appealing part of an insurance portfolio.
Like all insurance policies in some sense, short term disability insurance offers a safeguard against the occurrences that we least like to contemplate. If those events do occur, however - especially when coupled with long term disability coverage to seamlessly provide support through a more significant period away from the job - short term disability coverage can provide a necessary stop-gap to allow life to continue as normally as possible given the circumstances, at least from a financial perspective.
In this sense, short term disability insurance can be a boon to the unfortunate position you may find yourself in just when you need it the most.
What’s a Good Short Term Disability Policy?
As with most insurance offerings, the difference between a good policy and a bad one is usually in the eye of the policyholder. Obviously, a short term disability policy that has a broader range of covered illnesses and injuries provides more protection than a policy with a narrower range of covered conditions.
However, that broader range almost certainly comes at a higher premium cost or an especially short term during which claims are paid. It could also mean a lower percentage of policyholder earnings is paid out in the event that covered conditions occur.
Alternatively, a policy with a really broad range of coverage, low premiums, a long coverage term, and that pays out claims with a high percentage of policyholder earnings could very well be too good to be true if it also has a particularly cumbersome claims-filing process or the provider pays out a relatively low percentage of claims relative to its competitors.
These are the trade-offs that a prospective policyholder must consider, but that consideration should not happen in a vacuum.
Instead, often the most important considerations for a prospective policyholder are:
How will this policy complement or be redundant within the context of my existing insurance holdings?
What kind of coverage do I really need to ensure the best possible outcome in the event that such an illness or injury occurs?
In answering these questions, it is advisable to speak directly with an insurance broker who has experience with short term disability insurance in order to best plan and prepare for the occurrence of the very unfortunate events for which risk mitigation is sought.
Top 5 Questions to Ask a Broker About Short Term Disability Insurance
What is the range of conditions that will be covered by each potential short term disability policy?
In the event that a covered claim is made by a policyholder, what is the length of the term for which a given policy will continue paying out benefits?
What percentage of a policyholder’s earnings will a given policy pay out for covered claims, and is that percentage customizable depending on the amount the policyholder is paying in monthly premiums?
How does a given policy handle less severe illnesses or injuries that don’t necessarily preclude policyholders from working entirely?
What additional types of insurance (potentially including long term disability insurance, accident insurance, hospital indemnity insurance, and critical illness insurance) would best complement short term disability coverage in order to optimize risk mitigation and breadth of coverage?
How to Find a Short Term Disability Insurance Broker
To find a broker in your area with experience in short term disability insurance and knowledge of your particular industry to best help you tailor policy coverage to your company’s needs, search Mployer Advisor today.
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Our goal is to help you find the best insurance broker for your unique needs, industry, location, and company size. Search now.
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At Mployer Advisor, our focus is creating transparency in the insurance and insurance broker, consultant and advisor space to the advantage of the employer. Analytics is our core and we will bring to light new information, tools and resources to aid employers in making more cost-effective decisions. As a phase I, we are here to help employers find the right broker or consultant and the right insurance company for them. Giving choice and initial transparency is a first step in creating an employer centric insurance marketplace.