Short vs. Long Term Disability Insurance
Updated: Aug 18, 2020
Duration of benefits is not the only difference.
Short Term Disability Insurance will generally begin paying benefits soon after the date of disability and last for three (3) months or six (6) months. After that, Long Term Disability Insurance takes over and lasts until age 65, 66, or 67, although it can last longer in special cases.
Short and Long Term Disability are actually group insurance terms, and refer to a completely different type of product than individual insurance, which goes by Individual Disability Income (IDI) or Disability Income (DI). Because individual insurance is customized to the applicants' needs, individual insurance does not need to be classified as short or long term term with state regulators the way group insurance does. Individual insurance simply gets configured according to individual desires.
The real reason for the differentiating Short Term from Long Term Disability is to provide different funding methods for employers.
As a group employee benefit, funding can be either self-funded or insured. Self-funded means that the group is using it's own cash reserves to pay the promised employee benefits as claims are incurred. Self-funding is extremely rare for Long Term Disability benefits, even for large groups. Short Term Disability benefits, however, are often self-funded among large employers because the short Benefit Period leaves little risk to be transferred, allowing employers to capture the risk premium for themselves.
Small and mid-sized employers often insure for Short Term Disability anyway, because the HR team must run lean and is not equipped to manage the legal risk that disability brings. Insured programs reduce employer legal risk by transferring responsibilities to an insurance company, which must stay on top of regulatory changes, execute requirements in accordance with the law, and use pre-determined protocols for managing claims so that employers don't make the mistake of treating employees differently.
The business motivation to adopt Short and Long Term Disability Insurance is to stabilize payroll and reduce the legal risks associated with terminating sick employees. Almost all businesses name labor as their highest expense. Many businesses readily admit that managing compensation costs is a constant struggle. So, when workers become unproductive for health reasons, the business faces difficult questions about when to let them go and how this would best be handled. Instead of firing sick employees just as they are about to lose their house, which may invite legal action and employee relations problems, employers use disability insurance to voluntarily coax employees off the payroll and leave it to the insurer to pay benefits for as long as the policy permits.
Maternity or pregnancy benefits are a common application for Short Term Disability, whether insured or not. However, only group Short Term Disability is required by law to treat pregnancy as any other illness. Individual disability insurance typically excludes for normal pregnancy or is subject to a ninety-day waiting period, which of course makes it unlikely for benefits to be paid unless there are complications. Between these two options, a ninety day waiting period with normal pregnancy included is the better choice because the reliability of policy performance is more important than small dollar timing issues.
On the job injuries are effectively not covered with short term disability insurance due to integration with workers compensation, although workers compensation may not apply to everyone, especially salaried employees and owners who may qualify as exempt, in which case there will be some benefit. There is more variety in the individual market, where policies are available both with and without occupational coverage.