This too shall pass.
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If you canât work, you arenât bringing in the income you need to pay your bills and buy groceries. For many workers, even a short period without a paycheck can be financially devastating. Short-term disability insurance helps bridge that gap by replacing a portion of your earnings when you canât work but expect to return to your job within a few weeks or months.
Whether youâre recovering from surgery, dealing with a temporary illness, or taking time off for pregnancy, short-term disability benefits can provide financial support. Although many policies are offered through employers, you can purchase coverage on your own. Understanding how these policies work, what they cover, and how much they pay can help you decide if a policy is right for you.
Key Points
- Short-term disability typically replaces a portion of your income for three to six months, although some policies pay benefits for up to a year.
- Policies typically cover 40% to 70% of your income.
- Coverage may be offered through your employer or purchased individually.
What is short-term disability insurance?
Short-term disability insurance provides income replacement when you canât work because of an illness or injury. Short-term disability usually pays weekly benefits of up to 70% of your income for three to six months, although some policies extend payments for up to a year. Before receiving benefits, an âeliminationâ (waiting) period is often required; this typically lasts 14 days, although it can vary by policy.
Generally, when you have a short-term disability, you arenât eligible for Social Security disability benefits. Short-term disability also differs from workersâ compensation, which covers work-related illnesses and injuries. If your impairment or sickness lasts beyond a few months, long-term disability insurance may provide extended coverage once short-term benefits run out.
SSDI: Donât count on it for short-term disability
Some workers assume Social Security Disability Insurance (SSDI) can replace lost income if they canât work, but qualifying is difficult and benefits arenât immediate:
- Strict eligibility. SSDI only covers disabilities that are expected to last at least 12 months or result in death, so temporary conditions donât qualify.
- Lengthy delays. Initial decisions take three to six months, and most claims (about 65%) are denied. Appeals can take a year or longer.
- Waiting period. Even if your claim is approved, benefits donât start for five months.
- Low payouts. The maximum monthly benefit is $967 for individuals, which is often less than full-time minimum wage earnings.
For short-term disabilities, SSDI isnât a reliable safety net. Without other income sources, you could be left without financial support for months.
Short-term disability also differs from the Family and Medical Leave Act (FMLA), which allows eligible workers to take unpaid leave for their own serious health condition or to care for a child or other family member. Although the FMLA protects your job when youâre unable to work, it doesnât guarantee income replacement.
What conditions qualify for short-term disability?
Most short-term disability policies cover medical conditions that temporarily prevent you from doing your job. Injuries from an accident, recovery from surgery, and contagious illnessesâthe flu, for exampleâthat require time off are typically covered.
You might also qualify in other health circumstances:
- Pregnancy. If you need to go on bed rest or have a pregnancy-related medical condition, you may be eligible for benefits. Policies vary, though. Pregnancy is sometimes considered a preexisting condition if you werenât enrolled before becoming pregnant, which could affect your claim.
- Mental health conditions. Depending on the nature of the mental health issue, short-term disability may cover time off for issues such as depression and anxiety. These claims typically require more documentation than other medical conditions.
Not all situations qualify for short-term disability benefits, even if you have a medical condition or injury. Claims are often denied in cases involving:
- Intentional self-inflicted injuries (also known as self-harm)
- Injuries caused by illegal substance use, criminal activity, or participation in a protest
- Time off for a cosmetic procedure that isnât medically necessary
A medical professional typically needs to verify your condition and confirm that youâll be able to return to work after recovery to qualify for benefits.
Cost of short-term disability insurance
Several factors influence the cost of your short-term disability insurance premiums. As a general rule, premiums range from 1% to 3% of your annual salary.
Choosing an elimination period
A longer elimination period can mean smaller premiums, but it also means you receive benefits for a shorter time overall. Consider whether your emergency fund can handle more than one or two weeks of living expenses. With disability insurance, you can avoid depleting your savings while youâre unable to work.
Factors that affect cost include:
- Personal factors. Your age, gender, and health all affect your premium cost. Your occupation also plays a role. High-risk jobs, such as construction work, often come with higher costs than low-risk office jobs.
- Income level. If you earn a higher salary, your premiums may be higher, since benefit payouts are based on income.
- Benefits percentage. Choosing a policy that replaces 70% of your income costs more than one that replaces 50%.
- Elimination period. The standard waiting time for benefits to begin is 14 days. Choosing a shorter waiting period, such as 7 days, increases premiums, while opting for a long period like 21 or 30 days results in lower costs.
- Benefit period. A policy that only pays out for three months costs less than one that provides benefits for six months or up to a year.
Are short-term disability benefits taxable? The Internal Revenue Service (IRS) determines whether short-term disability benefits are taxable based on how the premiums are paid:
- Employer-paid premiums. Benefits are fully taxable, whether premiums are paid directly by the employer or through a cafeteria plan with pre-tax dollars, since the IRS considers those to be employer paid.
- Individually paid premiums (after-tax dollars). Benefits are nontaxable.
- Shared employer/employee contributions. A portion of the benefits is taxable.
A benefits plan, not a lunch menu
The term cafeteria plan comes from the idea that employees can pick and choose benefits, not unlike selecting food items in a cafeteria. Although the phrase may sound dated, it remains the official term under Section 125 of the Internal Revenue Code, which governs pre-tax benefit options. Many companies now refer to them as flexible benefits plans.
How to apply for short-term disability insurance
Depending on where you live, you may have access to a state-mandated short-term disability program. California, Hawaii, Rhode Island, New Jersey, New York, and Puerto Rico require employer participation or contributions to provide partial wage replacement for qualifying medical conditions. Benefit amounts, eligibility rules, and durations vary. If you live in one of these locations, review program details to see how you qualify and what benefits you could receive.
Even if your state doesnât offer a disability program, your employer may provide short-term disability coverage as part of its benefits package. Review the details, including the elimination period and coverage limits, to see if it meets your needs.
If your employerâs plan doesnât provide enough coverage, an individual policy can be purchased separately. Numerous insurers offer short-term disability policies, including Aflac, Mutual of Omaha, and The Hartford. Compare quotes from multiple insurersâat least threeâto find a policy that fits your budget and coverage needs.
Short-term disability insurance can be a financial safety net when youâre unable to work because of an injury, illness, or pregnancy. By paying a relatively modest monthly premium, you can replace a portion of your income and avoid depleting your emergency fund.
Whether short-term disability insurance is worth the cost depends on your financial situation. If you have at least six monthsâ worth of savings, you might not need additional coverage. But if losing even a few weeks of pay would put you in a difficult financial position, having a policy can provide crucial support while you recover.
Specific companies and services mentioned in this article are for educational purposes only and do not constitute an endorsement.
This article was most recently revised and updated by Miranda MarquitThis article was most recently revised and updated by David Schepp
