Short-term vs. long-term disability insurance: What's the difference?

Financial planning isn't just about preparing for what you hope to do years down the road. It's also about being ready for whatever surprises may spring up along the way. Among them is the possibility you could develop a debilitating injury or illness that prevents you from working.

Disability insurance can help you maintain a stream of income if that happens. It can cover short-term disabilities (where you expect to return to work after a brief time) or long-term ones (where you expect to be out of work for a significant time or indefinitely).

Typically, short-term disability income protection is offered through employers as an employee benefit along with long-term coverage. You may have an additional individual contract that covers long-term needs, but it's important to know that short- and long-term disabilities involve different waiting periods, benefit periods and benefit amounts. Understanding the distinction between short-term vs. long-term disability insurance can help you be sure you have coverage that can protect you in different situations.

To receive short-term disability benefits, you generally have to be diagnosed with a qualifying medical condition that's covered by the plan. These typically include injuries that develop or happen outside of work, such as chronic back pain or complications related to pregnancy. If your employer has workers' compensation insurance, which they're required to carry in most states, work-related injuries would be covered by that plan instead.

Even though you may stop working from the time you become disabled, you won't start to receive disability benefits until the waiting period, or elimination period, has ended. This is usually between seven to 30 days depending on your coverage, with 14 days being common. People often use their sick time or paid time off to fill the gap before short-term disability kicks in.

After the elimination period, you'll receive payments at the stated level until either you recover or your benefit period ends. Usually, the longest period a contract will cover is 13 to 26 weeks.

Short-term disability coverage is intended to replace some or all of your income for a condition that prevents you from performing essential job duties only for a relatively brief period. Depending on your contract, the benefit may cover anywhere from 40% to 100% of your base income.

Long-term disability policies cover many of the same injuries and illnesses as short-term disability with the distinction that they keep you from working your job longer. Some long-term contracts have an "own occupation" feature where they'll specifically cover medical conditions that prevent you from performing your regular job even if you're able to work in another role or industry. Conversely, "all occupation" contracts only provide benefits if you can no longer work in any job. Before you sign your contract, make sure you understand which type of coverage you're getting.

The elimination period for long-term disability insurance can be as short as 30 days, but 90 to 180 days is most common. It's so much longer than short-term disability because it can take weeks to collect detailed medical records and other supporting documentation that must all be reviewed thoroughly to assess the claim. Usually, the shorter the waiting period, the more expensive your premiums will be.

Once benefits begin, they will continue for the period stated in your contract, which may range from around two years to the day you retire. A longer coverage period will provide greater protection for you and your loved ones, but it also typically means you'll pay higher premiums.

Long-term disability insurance is meant to replace some but generally not all of your lost income when a qualifying condition prevents you from being able to work for a significant stretch of time or indefinitely. Group coverage usually pays out between 40% and 66 2/3% of your income.

Because they cover different periods of time after you experience a medical condition, both short-term and long-term disability contracts are vital to your financial security. The payout can make it possible to continue paying for your housing costs, essential expenses and debts without having to clear out your savings or borrow money.

A few states require employers to provide short-term disability coverage to all their employees. But none require them to provide long-term policies. However, many companies offer this type of coverage as either a paid benefit or an option for you to purchase it at a discounted group rate. Some group policies allow the employee to increase their coverage to a higher percentage. Even if you have disability insurance through work, you may want to review your contract to make sure it provides adequate coverage no matter how long you're unable to work. If you require additional protection, you'll want to consider purchasing supplemental coverage on the individual market.

As you customize your contract, make sure to consider these factors in determining how much disability insurance you need:

• Is the elimination period suitable? You may need a shorter waiting period if you don't have a sizable emergency savings account to draw from. You'll likely pay a higher premium, but you'll receive insurance benefits faster if you incur a medical condition that prevents you from working.
• Will the benefits last long enough? Make sure the benefit period is sufficient to cover your income needs if you experience a lengthy illness or injury. It is crucial to check that there aren't any gaps between your short-term and long-term disability coverage that could create financial challenges.
• Does the policy replace enough of your income? While it's important to have a policy that can cover most of your short- and long-term income needs, know that it's not possible to cover your full income up to 100%. Be sure to take the tax treatment of your insurance payout into account when evaluating your coverage. Benefits from a policy that you pay for with after-tax dollars are generally tax-free, unlike those from company-provided insurance. Also, make sure you fully fund your emergency fund to fill the gaps where you can.

Disability insurance protects your income if you face a serious medical issue, providing a critical safety net for both you and your loved ones. Even if you have disability benefits through your employer, you should review your coverage to make sure you have the protection you need. A Thrivent financial advisor can help you identify your coverage needs so you can be prepared for whatever life brings.