Disability Insurance

Disability Insurance

Disability insurance provides protection by replacing a portion of your income, usually between 50 percent and 70 percent, if you become disabled as a result of an injury or illness. This type of insurance may have considerable benefits since a disability can be a two-fold financial problem. Those who become disabled often find they are unable to work and are also saddled with unexpected medical expenses.

Disability coverage may be available through your employer, who may pay all or a portion of the cost for your coverage. Employer plans typically pay up to 50% of your income. This limited coverage might not be enough to meet your bills, which is why you may want to supplement employer-based coverage with a personal policy.

How do you prepare for an unplanned absence from work as a result of an injury or illness? No one foresees needing disability benefits. But, should a problem arise, the educated and informed employee can plan for the future by purchasing disability insurance to help cover expenses when needed. Disability insurance is categorized into two main types explained below.

Short Term Disability Insurance

As the name suggests, Short-Term Disability (STD) insurance kicks in fairly quickly once you’re disabled. Short-Term Disability covers 40–60% of your base salary and can last for a few weeks to a few months to a year. There is typically a short waiting period before benefits begin after the report of disability. This plan is generally sponsored by your employer.

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Long Term Disability Insurance

Long-Term Disability insurance (LTD) is an insurance policy that protects you from loss of employment income in the event that he or she is unable to work due to illness, injury, or accident for a long period of time. LTD insurance begins to assist the employee when short-term disability insurance (STD) benefits end. 

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Short Term Disability Insurance

Employer-provided short-term disability (STD) insurance pays a percentage of an employee’s salary for a specified amount of time, if they fall ill or get injured, and cannot perform the duties of their job. Generally, the benefit pays approximately 40 to 60 percent of the employee's weekly gross income and the duration of short-term disability benefits is typically between 9 to 52 weeks.

Short-term disability insurance does not protect against work-related accidents or injuries because those incidents would be covered by workers' compensation insurance.

Independently-purchased short-term liability insurance works relatively the same, offering a range of partial to full income coverage, depending on the policy level and premium you choose to pay. 

Long Term Disability Insurance

Long-term disability insurance (LTD) begins to assist the employee when short-term disability insurance (STD) benefits end. Long-term disability insurance is usually provided and paid for by employers. If a company doesn’t offer long-term disability insurance or if an employee wants additional coverage, he or she has the option of purchasing an individual long-term disability policy. 

Long-term disability insurance, provided by an employer, may be inadequate to meet a disabled employee's needs, so employees might want to consider purchasing supplemental long-term disability insurance. Additionally, payments to the employee from their employer's long-term disability insurance are taxable income whereas payments from an employee purchased plan are usually not.

Each long-term disability insurance policy has different conditions for payout, diseases, or pre-existing conditions that may be excluded, and various other conditions that make the policy more or less useful to an employee.

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Disability Insurance - Frequently Asked Questions

  • What is Disability Insurance?
    Disability insurance is income protection. It’s insurance that pays you, the policyholder, a regular paycheck when you’re hurt or sick and can’t work. It protects your income from the very real possibility you’ll be disabled for a period of time during your career, whether due to injury or illness. If you have disability insurance through your employer, you may pay for the policy, your employer may pay for the policy, you may split the cost—but either way, you’re the one who’s paid if you can’t work because of disability.
  • What is Short-Term Disability Insurance?
    Short-term disability insurance kicks in fairly quickly once you’re disabled. Think of a few weeks to a few months. It can be useful in the following cases: If you’re injured—let’s say you fall and break your arm. If you need a surgery to repair a joint and you won’t be able to work for a few weeks. If you have a baby and take time off for maternity leave (that’s right, short-term disability pays you money when you have a baby…now if we could only find some type of coverage to “pay” you in hours of sleep and maybe take on diaper duty).
  • What is Long-Term Disability Insurance?

    The first difference of short-term vs. long-term disability insurance is in when the policy begins to pay out. Your long-term disability policy begins to pay after you’ve exhausted a longer waiting period. Usually three to six months. If you’re looking at a longer recovery, or a more serious condition, this is where your long-term policy will come in. A long-term disability policy will continue to pay for much longer, as well. How long depends on the policy—you may get benefits for a year or two, or you may receive benefits until you reach retirement age.

  • Who Pays for Short-Term Disability Coverage?
    A short-term disability policy can be an employer- or employee-paid benefit. Generally, though, employers offer short-term disability coverage as a benefit. Companies do have a choice of having employees pay for coverage, with certain tax implications. Each state sets its own requirements as to whether employers must carry short-term disability insurance and the mandated limits of basic coverage amounts. States can also dictate the amount of the weekly cash benefit limits.
  • Should I Buy a Personal Disability Policy Outside of My Employee Benefits Package?
    Employees are responsible for examining their employer's policy to ensure that it meets their needs. If not, employees are responsible for purchasing their own expanded coverage. The duration of benefits are varied—some plans pay three to 10 years' worth of disability, while others may pay until age 65 based on a rate schedule. It depends on the choices the employer has made. If your employer plan does not adequately replace your projected lost income then we recommend exploring personal disability policy options in addtion to your employer coverage.
  • Who Pays The Insurance Premiums?
    Premiums are the amount paid regularly to an insurance plan. Years ago, many companies paid premiums for long-term disability. Employers have switched to extending different options to employees for payment of premiums. Depending on which option is chosen, there may be different costs and tax implications. Options include: Employer-paid premiums, Employee paid premiums, and Shared cost plans.

Be Prepared for The Unexpected

It is important to account for various risks that could interfere with your goals and to be prepared for any potential obstacles that may cross your path. While your financial plan should be designed to sustain you through market volatility, there are a wide range of frequently overlooked risks that need to be taken into account as well.

When unexpected life events occur, they often cause a ripple effect, leading to a host of financial consequences down the road. To prepare for these challenges, it's important to take them into consideration when designing your financial plan. This kind of proactive thinking is essential to insurance planning.  

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