Disability Insurance Explained: Deciding Between Short-Term and Long-Term Plans
More than a third of employers currently offer some type of disability insurance to their team, according to the Bureau of Labor Statistics. It’s no surprise, employees can unexpectedly fall ill or face challenges that keep them away from work, even if those challenges aren’t job-related. Offering either short-term or long-term disability coverage helps provide income continuity and peace of mind for your staff.
In this guide, we’ll walk through how both types of disability insurance work, weigh their advantages and disadvantages, and share expert insights to help you choose the right option for your business and team.
Why disability insurance matters
Disability insurance is designed to replace part of an employee’s income when they’re unable to work due to illness or injury. It ensures workers aren’t left without a paycheck during difficult times, making it a critical benefit for employee well-being.
The two main types employers typically provide are:
Long-Term Disability (LTD): This coverage pays out monthly benefits when an employee is unable to work for an extended time, typically beyond six months.
Short-Term Disability (STD): This type covers shorter periods of absence, from a few days up to six months, and is sometimes called “sick pay.”
Is disability coverage required?
The basics: Short-term disability insurance isn’t federally mandated, but a handful of states, including California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico, require it.
What about LTD? Long-term disability insurance is not legally required anywhere in the U.S. However, according to the Insurance Information Institute, around 50% of employers still choose to offer it.
Can employers include themselves in the coverage?
Yes. Business owners can typically enroll themselves in the same group disability insurance offered to their employees. Be aware that this may raise premium costs due to higher income levels and age-related risk factors commonly associated with owners.
What conditions does disability insurance typically cover?
Here are some examples of events that might qualify an employee for short-term disability benefits:
- Serious illness (e.g., COVID-19 or similar conditions)
- Off-the-job injuries
- Pregnancy or postnatal recovery
- Surgery and recovery
- Certain mental health issues (e.g., anxiety, depression)
- Non-work-related accidents
Understanding the elimination period
The elimination period is the time between the onset of a disability and when benefits begin. As Paul Foery, former Vice President of Insurance at Beyond, explains:
“The elimination period is a waiting period that an employee must fulfill before filing a claim for disability benefits. If the claim is valid, the carrier determines if the worker will receive any income replacement, after paying out of pocket, for expenses they have incurred outside of the workplace.”
Generally, STD plans have shorter elimination periods (as little as 7 days), while LTD plans may require waiting 90 days or longer.
How elimination periods affect premiums
Shorter waiting periods allow employees to receive benefits sooner but typically come with higher premiums. Longer elimination periods lower the employer’s cost but delay when benefits start. Each employer must weigh these options based on budget, workforce demographics, and risk tolerance.
Choosing the right waiting period
Foery advises employers to evaluate their teams’ unique needs: “Think about your budget, the likelihood of non-work-related injuries, and the age or life stage of your workforce. For instance, if many employees are of childbearing age, short-term disability covering maternity leave might be a must.”
Comparing short-term and long-term disability insurance
Short-Term Disability: Pros
- Quick to set up through most benefits platforms
- Immediate financial support after sick leave runs out
- Useful bridge to LTD coverage
- Helps employees stay afloat during temporary hardships
Short-Term Disability: Cons
- Limited coverage duration
- Replaces only a portion of income
- Typically more expensive for employers than LTD
- May have a waiting period before benefits start
- Benefits may be taxable if the employer pays the premium
Long-Term Disability: Pros
- Supports employees with serious or chronic conditions
- Can provide benefits for several years or until retirement
- Higher income replacement than STD
- May include pre-existing conditions
- Enhances employee retention and morale
Long-Term Disability: Cons
- Longer wait for benefits
- Employer-paid premiums may result in taxable benefits
Final thoughts
Offering disability insurance, whether short-term, long-term, or both, is a strategic way to show you care about your employees’ well-being. While it’s not always required, it can make a big difference when life takes an unexpected turn. Consider shopping around and comparing plans to find the best fit for your team’s needs.
With guidance from trusted partners like Beyond, you can streamline the benefits process and make sure your staff is supported no matter what lies ahead.
