Why Does Short-term Disability Cost More than Long-term?


Though it can seem counter-intuitive, short-term disability sometimes cost more than long-term disability. That may not seem right on the surface, because ultimately a long-term plan can potentially pay out far more in benefits then a short-term plan. Yet still, it is often true that short-term disability costs more.

How can it be?

Short-term Disability Often Pays a Higher Benefit

Long-term disability plans are usually capped at no more than 60% of your regular income. Short-term disability, on the other hand, can pay 80% of your regular income, and even more under certain circumstances.

Even though short-term disability can be expected to run for shorter terms, there’s always the possibility that a long-term plan will never need to pay out benefits for the life of the policy. This is possible since many forms of disability are temporary.

As with most forms of insurance, the cost of the policy is generally lower if the upfront benefits that will be paid will be lower. And this is almost always the case with a long-term disability plan.

Long-term Disability Plans Have a Longer Waiting Period

Do you know how when you purchase an insurance policy, the premium will be lower if you include a higher deductible? The same situation applies when it comes disability insurance, except that the “deductible” equivalent is measured in time. That time plays out in the form of a waiting period.

All disability policies have a waiting period, and it is considerably longer for long-term plans than it is on short-term policies. While a short-term disability plan may begin paying out benefits within 30 days, the waiting period for long-term disability can be as long as a full year, though it is often less.

The fact that long-term disability plans have a considerably lower amount of upfront benefits enables insurance companies charge lower premiums. The difference in the benefit payout can be tens of thousands of dollars, especially when you include the fact that long-term policies have a smaller percentage of your income.

Many Disability Claims are Short-term

Even though you have a long-term disability policy, it’s very likely that your disability will be short-term. That enables insurance companies charge less for long-term policies.

If your policy has a waiting period of one year, it’s entirely possible that you will be ready to return to work before the waiting period is over. That will mean that the insurance company won’t have to pay out any benefits. Even if your disability does extend beyond one year, it may run only a few months into the second year.

By contrast, if you have a short-term disability policy that begins paying benefits within 30 days, and the term of the policy runs up to two years, the insurance company may be paying out benefits for a full year. And they may be paying them at a higher percentage of your income than would be the case of a long-term policy.

Greater Restrictions

A short-term disability policy, particularly one provided by your employer, is likely to have a very narrow definition of disability. It will likely define disability as your inability to perform your current job. That is the simplest definition for disability. That will mean that the insurance company will begin paying benefits as soon as it is determined that you cannot continue your current job.

A long-term disability policy, especially a private policy, may have a more restrictive definition of disability. They consider disability to be your inability to perform any type of work, in which case you’ll only be able to get benefits in the event that you are disabled to the point of the unemployable.

For example, if you work as an auto mechanic and become disabled, you may be denied benefits under this definition if you’re capable of working as a clerk in a retail store. In this situation, it’s conceivable that the insurance company will never pay any benefits.

But Just as Often, Short-term Disability is Less Expensive

It’s important to understand that short-term disability isn’t always more expensive than long-term disability. Much depends upon the details and terms involved in each policy. We’ve already discussed the importance of the definition of “disability”, and how that can affect both the benefits payout and the cost of your policy. But there are other issues that favor a less expensive short-term policy.

Short-term disability is often less expensive, because overall the policy will pay out less in benefits than a long-term plan will. Since a short-term disability plan may be limited to two years, the total benefits payout will be substantially less than the lifetime claim on a long-term disability plan. Even though the short-term plan will be more expensive for the insurance company in the short run, the benefits will end at the end of the term. By contrast, a long-term disability plan can payout benefits for decades.

What’s most important is that you get some kind of disability insurance plan in place, and one that you can comfortably afford to carry throughout your working life. At a minimum, you should have a short-term plan that will provide you with an income during the early months and years of your disability. That will give you time to arrange your finances and your occupation for long-term survival.

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