What is Short-Term Disability Insurance? How Does it Work?

According to insurance industry experts, working Americans face a growing crisis: a lack of adequate disability insurance coverage. Millions of workers lost their disability insurance benefits when laid off during the pandemic, and millions more forfeited coverage during the recent “Great Resignation.”

Jump ahead to these sections:

• Definition of Short-Term Disability Insurance
• The Difference Between Short-Term Disability Insurance and Long-Term Disability Insurance
• What Does Short-Term Disability Insurance Cover (Or Not Cover)?
• How Much Does Short-Term Disability Insurance Cost?
• Other FAQs About Short-Term Disability Insurance

The lack of disability coverage puts families at significant risk financially if they need to miss work due to injury, illness, or pregnancy. The Council for Disability Awareness illustrates the depth of the crisis with some significant statistics.

At least 51 million working adults in the United States are without disability insurance besides the basic coverage they have through Social Security. Only 40% of U.S. households have enough liquid savings to cover at least three months of their recurring expenses, and only 28 percent can cover at least six months. Three out of ten American adults indicate they can’t pay an unexpected $400 bill without carrying a balance on their credit card or borrowing money from friends, family, or the bank.

These statistics clearly illustrate that not only is America not a nation of savers, but it also shows that a short-term interruption of our paychecks could have devastating results.

Short-term disability insurance is part of the solution to this dilemma. Unfortunately, many people don’t know much about it, and many others that have access to it don’t take advantage of it. Let’s look at what it is, what it covers, how you can qualify for it, and more commonly asked questions. 

Definition of Short-Term Disability Insurance

Short-term disability (STD) insurance replaces a percentage of your income if you experience a temporary illness or injury and are unable to work. It was developed to protect you from events that would prevent you from working for a limited time but that you would generally recover from. 

Examples of claims filed where short-term disability helped families pay their bills are an electrician breaking a hand, an airline pilot undergoing back surgery, or a pregnant teacher giving birth. STD coverage is most often obtained as an employee benefit from an employer or individually from a private insurance company.

The Difference Between Short-Term Disability Insurance and Long-Term Disability Insurance

There are three significant differences between short-term and long-term disability insurance:

• The illnesses and injuries they cover
• The length of time you can receive benefits
• How long you have to wait to start receiving compensation following a disabling event

Here’s a chart comparing the coverages (courtesy of Breeze):

Most financial advisors recommend that you don’t forgo buying long-term disability insurance because you have an STD policy. Short-term coverage isn’t adequate if you suffer a serious illness or injury. Once your STD coverage runs out, you could find yourself without any income after just a few months. 

Advisors recommend concentrating on buying a long-term disability policy and supplementing it with an STD policy through your employer. Combining the coverages gives you the best possible protection against just about any illness or injury that would impact your ability to earn an income.

What Does Short-Term Disability Insurance Cover (Or Not Cover)?

Short-term disability insurance covers injuries and illnesses that keep you from working for a shorter period than those that result in a long-term disability. 

For example, a surgeon who breaks their hand will benefit from an STD policy. In contrast, one who mangles their hand and will never be able to operate again will need benefits from a long-term disability insurance policy. 

Like every type of policy that life insurance companies and disability insurers sell, definitions and benefits will vary by insurer and policy. But, it can be generalized that your eligibility for benefits is tied to your ability to perform the duties of your current occupation. 

In the case of our disabled surgeon referenced above, even though they could become a college professor after becoming disabled, they would still be able to receive benefits from their disability policy because they couldn’t perform surgery.

In addition to illnesses and injuries that prevent or limit you from working, surgical procedures classified as “medically necessary” will allow you to qualify for STD benefits. For example, some policies pay benefits if you miss work because you need bariatric weight-loss surgery, and they’ll also typically cover organ donation. However, cosmetic surgery for appearance’s sake will likely not be covered. 

One of the most common uses of STD insurance is for maternity leave. Most policies will pay benefits for up to six weeks after a normal delivery and longer for a C-section. However, remember that pregnancy is considered a pre-existing condition, so if you were already pregnant when you enrolled in coverage, you’d likely receive no benefits for time off related to your pregnancy.

If complications result from pregnancy or delivery, you may be eligible for benefits from your policy either before or after delivery. 

There are basic exclusions included in all STD policies, such as:

• Intentionally self-inflicted injuries
• Active participation in a riot
• Loss of professional or occupational license or certificate
• Commission of a crime
• Job-related sickness or injury that workers' compensation would cover.
• Acts of war
• Criminal activities

In addition to pregnancy, STD policies often won’t cover people with other pre-existing conditions like:

• HIV/AIDS
• Cancer
• Heart disease
• Diabetes
• Neurological disorders

Another caveat: don’t expect your STD policy to cover the time-off you need to care for a sick family member. Your policy covers only your illnesses and injuries.

How Much Does Short-Term Disability Insurance Cost?

There are three main factors that affect the cost of short-term disability insurance. They include:

Your income: STD policies typically pay anywhere from 40 to 70 percent of your gross income. The more you earn, the more the insurer potentially has to pay out in benefits, which increases your premium. 

Benefit period: When you apply for STD insurance, you get to choose the length of time you’ll receive benefits if you file a claim. Benefit periods for STD policies range from three months to two years. Of course, the longer you’ll be receiving compensation, the higher your premium will be.

Elimination period: Also known as a waiting period, the elimination period is the time between when a disability occurs and when benefits start to be paid. Similar to a health insurance policy deductible, the longer it is before the insurance company has to begin paying a claim, the lower your premium will be.

To estimate the cost of STD insurance, you can use 1% to 3% of your annual gross income to gauge the yearly cost of a policy. 

Other FAQs About Short-Term Disability Insurance

Is short-term disability insurance taxable?

Since the premiums you pay for STD insurance aren’t tax-deductible, the benefits you receive won’t be taxed. This applies to both policies purchased through your employer or individually. 

However, if your employer is kind enough to foot the bill for your STD insurance premium, any benefits you receive will count as taxable income. 

It’s best to consult a tax advisor with any questions about the tax treatment of short or long-term disability premiums and benefits.

Can I work another job while I’m out on short-term disability?

There are two definitions of "disability" that insurers use: "any occupation" and "own occupation." The wording in your policy will determine whether or not you'll receive benefits if you work. 

"Any occupation" means you won't receive benefits if you work, and "own occupation" indicates the insurer will compensate you if you work while out on a claim, as long as the job's duties are substantially different from the job listed on your policy.

How long does it take for my short-term disability benefits to start?

All policies are different, but the typical waiting period is 14 days. During the time your claim is being assessed, the insurer is given the time to contact you if necessary. 

Does short-term disability protect my job?

No, your employer has the right to fire you while you’re out of work on short-term disability. For example, if you became disabled from an accident and couldn’t work, and it came to light that you had violated your employment agreement, your employment could be terminated. 

Can I travel while on short-term disability?

Technically, yes. You won’t find it written anywhere in your policy that you can’t travel. However, this may not be a good idea if you want to maintain good relations with your employer. Taking a trip to Cozumel after you’ve filed a claim stating that you’re physically unable to work isn’t sending your boss or insurer the message that you’re committed to your recovery.

Can my employer contact me while I’m out on short-term disability?

Yes, they can. You’re still considered an employee while you’re out on a claim. Your employer can periodically check in with you about your readiness to return to work, accommodation requirements, or other issues related to your job. 

That being said, repeated contact urging you to get back to work prematurely over a short period could constitute harassment. If that happens, you might want to consider getting legal representation. 

Do I need a doctor’s note for short-term disability?

Insurance companies are very vigilant when it comes to spotting fraudulent STD claims, so expect your carrier to require medical evidence to substantiate your claim. Without records from healthcare providers backing up your claim, it’s unlikely you’ll be approved to receive benefits.

How do I apply for short-term disability benefits?

The first step is to get claim forms from your employer, the claims administrator, or the insurance company. There are usually three forms for STD:

1. The employee’s statement
2. The attending physician’s statement
3. The employer’s statement

Once the paperwork is received, the insurance company will assign a case manager to handle your claim. They’ll contact you to get further information, discuss your claim with you, and answer any questions you have. Then, your claim will be approved or denied based on the eligibility requirements written in your policy. 

What other options do I have instead of buying short-term disability insurance?

Your best option to protect yourself against the loss of income from a short-term disability is to have an emergency savings fund equal to three to six months of your average monthly living expenses. Most financial advisors recommend this in place of buying STD insurance.

The Peace of Mind Factor

A financial advisor or accountant can help you crunch the numbers when deciding whether to buy short-term disability insurance. But, the one thing they can’t quantify for you is the peace of mind having the extra protection an STD policy can provide you. Knowing that your bills will be paid even if your paycheck stops coming is something that won’t appear on a spreadsheet, but it just might ease some of your stress concerning your family’s financial security.