Disability insurance demystified: Choosing between short-term and long-term coverage

Why disability insurance is a valuable employee benefit

Most employers provide disability insurance to their employees so that they can have some income if they become ill or are unable to work due to a life event that occurs while they are not on the job.

Long-term and short-term disability coverage are the two main types of group disability coverage that most employers are familiar with (and use).

Long-term disability (LTD) coverage

The option of long-term disability (LTD) provides monthly payments in the event an employee becomes disabled and is unable to work for an extended period of time — usually for a period lasting more than six months.

Short-term disability (STD) coverage

On the other hand, short-term disability (STD), sometimes referred to as “sick pay” provides a much shorter period of coverage. For example, it generally covers an employee for any downtime lasting between a few days and up to six months.

Is providing employees with disability insurance a requirement?

The short of it
Though short-term disability is not a requirement in every jurisdiction, there are some states that mandate coverage, including California, Hawaii, New Jersey, New York, and Rhode Island (and Puerto Rico does as well).

The long of it
Though no laws exist that require employers to offer long term disability insurance, per the Insurance Information Institute, roughly half of employers choose to offer it to their employees in some shape or form (this is specifically from the study the III conducted).

Can employers add themselves to their company policy?

Yes, in most cases, employers and business owners can add themselves to their company’s group disability insurance policy. Keep in mind that when doing so, policy premiums are likely to rise as a result of:

• Another person being added to the plan who is now eligible for disability coverage.
• Owners, in many cases, are older and there’s an increased risk for injury, illness or other life event.
• Furthermore, owners usually earn more than their employees. If an owner files a claim, the carrier will likely pay benefits based on a larger income.

Next, let’s take a look at how coverage periods differ if you decide to offer employees access to coverage.

Which conditions does disability insurance generally cover?

Employers will most likely want to know what kinds of life events typically qualify for short-term disability insurance coverage (in order to properly communicate its value to their employees). Here are some.

Illness: If an employee should become ill (with a condition like COVID-19) that prevents them from completing work, short-term disability should cover them in most cases, especially if it requires prolonged treatment or recovery. So if the employee only has a limited amount of paid time off (PTO), STD kicks in afterward (so the employee gets paid).

Injury/accident: There might be times when injuries suffered off the job are eligible for coverage. Short-term policies kick in when a non-work-related accident or injury occurs.

Pregnancy and childbirth: Short-term disability insurance may provide coverage for workers who are unable to work due to pregnancy-related complications or recovery from childbirth.

Surgery plus recovery: Does an employee need time to recover from surgery? Short-term disability insurance may provide coverage during that period.

Mental health: In some situations, short-term disability insurance may provide employee coverage if someone is unable to work due to mental health conditions, like severe anxiety or depression.

Non-work-related accidents: Was your employee injured in a non-work-related accident? In some cases, such as an auto accident, short-term disability insurance may provide coverage during the recovery period.

Now that we’ve gone over what’s typically covered, let’s talk about how long the benefits typically last.

Tailoring coverage for your employees: Short-term vs long-term disability insurance benefit periods

A key difference between these two types of coverage is how long your employees will receive benefits when they are not working.

Short-term disability insurance benefit period

The benefit period for short-term disability usually covers a smaller window of time, providing income replacement that usually lasts between 3 and 6 months (and the waiting period can be as short as one to 14 days).

Benefit amounts typically range from 50% to 60% of the employee’s income, and the costs are generally higher. Short-term disability insurance is often available through employer-provided plans.

Long-term disability insurance benefit period

On the other hand, long-term disability insurance is designed to provide income replacement for a longer period of time, which in some cases can be several years or up to age 65. With long-term coverage, the “elimination period,” also known as the waiting period, is typically 90 to 180 days (we cover the elimination period in more detail below).

Benefit amounts are typically up to 60% to 70% of the employee’s income, and the costs are generally lower than long-term disability insurance. It is often available through employer-provided group plans or individual disability income policies (DI). Even though this article goes into detail about group coverage, we should take a moment to explain what individual disability income, or DI, is.

A note on individual disability income policies (DI)
Although obtaining coverage can be more complicated, individual disability income insurance also replaces lost income in the event that an individual becomes disabled (and is unable to work) due to an off-the-job event.

For example, the employee who is being covered will have to go through underwriting and, depending on the wage and income being protected, may have to take a physical exam. DI is often used by the owner of a business, and some companies offer it to certain high-level employees as a perk.

Information your agent will ask for
Whether it’s a group or DI policy, to determine what the benefits will be, your agent (or broker) will usually want to know:

• Current employee salaries
• The business’s standard industrial classification (SIC) code. An SIC code is a four-digit number which the US government assigns to business establishments to identify what their primary business is
• Titles and roles of staff members receiving coverage. For example, is the carrier covering staff such as the sales and operations teams, but not the CEO?
• Date of birth for each person who should be covered

With more information on benefit periods under our belts, let’s look at elimination periods and what they’re used for.

Is short-term disability the same as workers’ comp?

No, it is important that employers understand that these are different things!

• With short-term disability, workers are covered even if there’s a qualifying event outside the workplace that causes them to miss work for a temporary period of time.
• With workers’ comp, the employee is due to miss time because of an injury or illness that occurs while working on the job.

Don’t be caught off guard by the elimination period

As we mentioned earlier, an elimination period is another way to describe what is traditionally known as the benefits waiting period in a long-term disability insurance contract. To learn more about how this affects workers, we spoke with OnPay’s Vice President of Insurance, Paul Foery. “The elimination period is a waiting period that an employee must fulfill before filing a claim for disability benefits,” he explains. “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.”

Foery also explains that the length of each elimination period depends on whether the benefits are short-term or long-term. “Usually, an elimination period for long-term disability insurance lasts 90 days or more, while a short-term policy can be as short as seven days.”

Weighing the pros and cons of short-term and long-term coverage

Like many business decisions, it’s a good idea to weigh both the advantages and disadvantages of disability coverage before moving forward with a plan. Below are some items to consider, from both the employer’s and employee’s perspectives.

Pros of short-term disability insurance

• Easy to add full-time employees through a benefits platform (most of the time workers just need to check off a box)
• In many cases, this type of coverage provides immediate coverage for employees who experience a disability or illness
• Can help bridge the gap between sick leave and long-term disability insurance coverage
• For valuable employees you hope stick around for the long run, it provides peace of mind and may prevent employees from leaving due to financial hardship

Cons of short-term disability insurance

• The coverage period is limited and may not be sufficient for employees with serious or chronic conditions
• Usually covers a small percentage of income
• Typically short-term disability costs more for employers to offer than long-term disability insurance
• There can be a waiting period before benefits are paid out
• Benefits may be subject to taxation if the employer pays the premiums

Pros of long-term disability insurance

• Employees get covered if they are a full time employee (just like STD it is easy to add employees to the policy)
• Provides coverage for extended periods of time, often up to several years or until retirement age
• Typically covers a higher percentage of an employee’s income than short-term disability insurance
• May cover pre-existing conditions or disabilities
• Provides financial stability for employees who experience a long-term disability and is another way to put an employee’s mind at ease

Cons of long-term disability insurance

• Patience is key as employees may have a longer waiting period before benefits are paid out
• Benefits may be subject to taxation if the employer pays the premiums

Bottom line: short-term and long-term disability benefits checks many boxes

Adding short or long-term disability insurance to your list of benefits can make a real difference in protecting your employees. Whether you opt for short-term or long-term coverage (or both), it can make sense to research different providers and shop around to find the best plan for your needs (and those of your employees). With the right coverage in place, you can rest easy knowing that your employees are taken care of in the event of illness or injury.