Is Short-Term Disability Insurance Worth It?

When you sign up for employee benefits, it’s easy to get confused by all of the options. Short-term disability insurance is a common type of coverage you’ll have to consider. When deciding if short-term disability insurance is right for you, consider the five points below.

Understand what the policy covers

Short-term disability coverage replaces your income for three to six months if you become disabled and unable to work. In this context, the definition of “disability” is broader than you might think. It covers any medical condition that prevents you from working, including injuries that occurred outside of work. Furthermore, short-term disability insurance also accounts for chronic illnesses, such as cancer, bodily injuries, and heart disease. Some policies count pregnancy and childbirth as a disability period. Using these criteria, one in four employees will endure a disability period before reaching retirement, based on data compiled by the Council for Disability Awareness.

Consider the cost

When you opt for short-term disability insurance, who’s paying the premium? If you get your insurance through your employer, you may receive a free or low-cost plan. Residents of Hawaii, California, Rhode Island, New Jersey and New York receive mandatory coverage, according to The Society for Human Resource Management. However, if you live in one of the other 45 states and don’t receive short-term disability benefits from your workplace, you can purchase a plan from a private insurer — although you may pay as much as $50-$150 every month. If you’re paying premiums like that, your short-term disability insurance may cost more than it’s worth.

Employment matters

Depending on your type of employment, your coverage options can vary greatly. While some employers provide affordable or no-cost coverage, self-employed entrepreneurs and independent contractors can only choose private insurance. Furthermore, if you work a dangerous job, you’ll likely pay much more for private insurance. According to Kevin Mercadante, a personal finance journalist and contributor to Money Under 30, you should budget about 1-3 percent of your yearly income to pay for private short-term disability premiums.

Know the differences

According to insurance expert Colin Lalley, short-term disability insurance replaces up to 80 percent of your gross income for three to six months, although in most cases, you’ll be paid between 40-60 percent of your income. However, those payments may not cover the full duration of your disability period. That’s why you should also consider long-term disability insurance, which doesn’t kick in until three to six months have passed. As such, long-term coverage is meant to pick up after its short-term equivalent has expired. Therefore, if you can receive affordable coverage, consider getting both plans. This is especially important if you live with a chronic illness or if you work a dangerous job.

Consider alternatives

If short-term disability insurance will put a strain on your budget, consider setting up an emergency fund. Many financial plans recommend having an emergency fund worth about three to six months of your salary. If you choose to combine an affordable short-term disability plan with your emergency fund, you should have an even less stressful time managing your finances during a health crisis. While the federal government does not offer any form of short-term coverage, you can see if you qualify for Social Security Disability Insurance. However, very few people qualify for SSDI based on its stringent guidelines. Furthermore, it can take months to receive your benefits and its payout is low compared to other plans.

For the majority of people, short-term disability insurance is a helpful safety net when provided at an affordable cost. While private plans can be costly, they’re the only form of protection that certain people can obtain. Speak with your employer’s human resources department, your insurance provider or financial planner to help you make the right decision for your lifestyle and budget.

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