Short-Term Disability Insurance

What You Need to Know About Short-Term Disability Insurance

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Short-term disability insurance pays a percentage of your salary if you become temporarily disabled, which means that you are not able to work for a short period of time due to sickness or injury not related to your job. Typically, a short-term disability policy provides you with 40 to 70 percent of your pre-disability base salary.

Some people have short-term disability insurance through an employer, union, or other professional organization.

This type of policy is known as group coverage. You can also purchase an individual policy directly from an insurance company or agent.

How Short-Term Disability Insurance Works

Most short-term disability policies have the same general design. You, or your employer, pay a monthly premium to be covered. When an illness or injury prevents you from working, you apply for a benefit by speaking with someone in your company’s human resources department or your insurance agent.

Most short-term disability policies require evidence from your doctor that explains your condition and estimates how long you’ll be gone from your job. Most likely, there will be a waiting period between the date you leave work and the date when you actually receive your benefits.

Your employer may require that you use some or all of your sick days before the policy begins to pay. Once the waiting period is over, you will generally receive a set percentage of the wages you received before you were disabled.

For example, if you were paid $1,000 per week, and your policy pays 60% of pre-disability earnings, you’ll get a benefit of $600 per week. Short-term policies generally last between 9 and 52 weeks, after which time your benefit will end. You may then have the option of moving to a Long-Term Disability policy or applying for Social Security Disability Insurance.

Pregnancy and maternity leave is a very common trigger for short-term disability claims. Family and Medical Leave Act (FMLA) rules allow 12 weeks of unpaid leave, but short-term disability insurance can be used to ensure that a new mother receives a percentage of her normal paycheck during at least some portion of her maternity leave. This only works, however, if the short-term disability plan has a relatively short waiting period before benefits kick in, so that benefits can begin paying during the 12 week FMLA leave period.

Under the Affordable Care Act, large employers are required to offer health insurance to full-time workers, and full-time is defined as 30 or more "hours of service" per week. In 2015, the IRS clarified that time for which an employee receives disability benefits (short-term or long-term) is considered "hours of service" which means that the employer has to continue to offer health insurance benefits as long as the employee is still considered an active employee (note that the ACA does not require employers to offer any type of disability insurance, but if they do, and if an employee is receiving disability benefits, those hours still count as hours of service).

How Short-Term Policies Differ

While most short-term disability policies have similar features, each may have different specifics.

Definition of Disability: Some short-term disability policies define a disability as an inability to work at your own job. These are known as “own occupation” definitions of disability. Other policies define disability as an inability to work in any job, known as an “any occupation” definition.

Service Wait: Some employers will only offer short-term disability plans after you have worked for them for a set period of time, for example, six months or one year.

Waiting Period: This is also referred to as an elimination period, and it's the time between when you become ill or injured, and when your disability insurance benefits begin. Most short-term disability plans have waiting periods of 0 to 14 days, although they can be up to 180 days. Generally, policies with a longer waiting period have lower premiums. Many short-term disability plans have different waiting periods for different types of disabilities. For example, a plan may have a seven day waiting period for an illness and no waiting period for an accident that happened outside of work.

Benefit Rates: Benefit rates vary, but are generally between 40 percent and 70 percent of your pre-disability earnings. If you want the higher rate, you may have to pay a larger premium. Some short-term disability policies change benefit rates during the benefit period. For example, your policy may pay 80% for the first three weeks of disability and then 50% for the remainder of your benefit period.

Benefit Periods: Short-term disability policies are intended to replace a portion of your income when you can't work for a relatively short period of time, usually three to six months. Some short-term disability policies will continue to pay benefits for up to two years, but those are less common (note that long-term disability coverage is a different type of policy that will continue to pay benefits for as long as you're disabled, up to age 65; long-term disability insurance is substantially more expensive than short-term disability insurance). Your short-term disability policy may allow you to return to work on a trial basis. For example, your policy may give you a two week trial period. If you go back to work for less than two weeks and then find that you can’t do your job because of your disability, the policy would allow you to continue your benefits as if you hadn’t returned to work.

Changes to your premium: If you sign up for a “noncancelable” short-term disability policy, the insurance company cannot change your premiums or benefits. However, if you sign up for a “guaranteed renewable” policy, the insurance company is allowed to change your premiums, but only if they are changing it for an entire group of policyholders. The best coverage comes with plans that are both noncancelable and guaranteed renewable, but those plans also tend to have higher premiums.

Exceptions: Many policies will not cover disabilities caused by suicide attempts, drug abuse, war, or attempts to commit a crime. Pre-existing conditions are also frequently excluded. On-the-job injuries, which are covered by workers’ compensation insurance instead, also are not covered.

How to Get Short-Term Disability Insurance

Signing up for a Group Plan
Your employer may offer a short-term disability plan as a job-related benefit option. If your company offers short-term disability insurance, you can sign up for the plan during an initial enrollment period. During this period, most short-term disability plans will not deny you coverage based on a pre-existing medical condition, so it is very important to sign up then.

You may be required to work for a certain period of time before a pre-existing condition is covered (known as an exclusionary period), but you should still be able to sign up for the plan. If you don’t sign up during the initial enrollment period, you may have to undergo medical underwriting. The insurance company will review your medical records to find out if you have a pre-existing condition. If the insurance company finds that you do, they can deny you coverage or have an exclusionary period for that condition (the ACA eliminated the use of pre-existing condition waiting periods and exclusions for health insurance benefits, but it did not change the rules relating to disability insurance).

Rules concerning short-term disability insurance vary from state to state. If you think your company or the insurer is not treating you fairly, check with your state’s insurance department. You can access your state's insurance department through the website of the National Association of Insurance Commissioners.

Signing up for an Individual Policy

If you're self-employed or work for an employer that doesn’t offer short-term disability insurance, you may want to consider buying an individual policy. You will have to undergo medical underwriting to get an individual short-term disability plan (again, the ACA didn't change anything about this; health insurance is guaranteed issue regardless of medical history, but disability insurance is not). When shopping for an individual policy, look for a reputable company and be sure to read all of the details of your policy.

You can find ratings of insurance providers at the following websites:

Updated by Louise Norris.

Sources

Disability Benefits 101

Internal Revenue Service, Notice 2015-87 Notice 2015-87.

United States Department of Labor, FMLA (Family and Medical Leave).

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