By Shelby Smoak, Ph.D.
In the last BioMatrix News issue, we focused on Social Security Disability, a government-supported program available to you if you have worked and paid into the disability program and are dealing with a disability/injury that will prevent you from working for a year or more.
This article focuses on short- and long-term disability plans that are protective financial coverage for persons who become unable to work for, typically, a shorter length of time. While there are many differences between Social Security Disability and short- and long-term disability coverage, a glaring contrast is that SSDI in addition to financial support will also offer you healthcare coverage via Medicare should you qualify; short- and long-term disability policies, however, are intended for financial security only.
Can a Disability Happen to You?
Certainly, members of the bleeding disorders community may likely answer a resounding “YES!” but too often those same persons may lack the financial protection of a short- and long-term disability policy.
In America, 51.2 million people, over 15% of our population, have at least one disability.1 Automobile accidents account for 2.8 million disabilities per year while home accidents contribute to a disabling injury every 3 seconds. Every year 5.6% of Americans experience a short-term disability.2
A bleeding disorder does not exclude a person from being subject to the possibility of another kind of disability. In fact, having a bleeding disorder may likely compound a disabling injury or illness, lending the need for short- and long-term disability insurance more imperative. Remember, a bleeding disorder does not make you immune to other health complications.
In addition, many caregivers of persons with bleeding disorders may have become so focused on their loved one(s) that they overlook protecting themselves from the same disability potential. A survey done by the Council for Disability Awareness revealed that over half of American families did not have enough money in savings to cover three months of living expenses (the average length for a short-term disability).3
So, if you are injured and unable to work, whether this is bleeding disorder-related or not, what is your plan for earning income and paying bills? If you need surgery for a joint replacement or any other bleeding disorder-induced complication, how will you pay bills during your recovery period? Having a short- and long-term disability policy will provide income for any unforeseen injury or illness, inside or outside of your bleeding disorder.
What Is Short-Term Disability Insurance?
Short-Term Disability is a type of insurance benefit that provides some compensation or income replacement for non-work-related injury or illness that renders you unable to work for a limited time.
“Non-work related” is important because injuries that happen on the clock will normally fall under workers’ compensation policies.
Common reasons for short-term disability are pregnancy complications, herniated discs, cancer, accidental injury, surgery, and mental health challenges.
What Are Typical Short-Term Disability Policy Coverage and Rules?
While benefit payment is plan-specific, on average a short-term policy pays 50-60% of your earned income when you are unable to do your job for a short amount of time.
Premiums are based on age and annual gross income but are typically 1-3% of your earned income. A person earning $50,000 a year can expect to pay $500-$1500 annually for a plan.
Many employers offer plans, or you can self-purchase a plan at, usually, a higher cost.
These 5 states require employers to offer short-term disability policies: California, Hawaii, New Jersey, New York, and Rhode Island.
The definition of “disability” is plan-specific and can sometimes be ambiguous, so please read the fine print when signing up for a policy.
Policies can be valid for 30 days to a year but are typically intended for 6 months or less of use.
Benefits will end when your policy coverage period concludes, when your predetermined time period is over, or when you return to work.
If you are unable to return to work when a short-term policy terminates, a transition to a long-term disability policy or Social Security disability may be necessary.
What Is Long-Term Disability Insurance?
Long-Term Disability provides insurance if you are out of work for a long period of time: usually years.
While benefit payment is plan-specific, on average a long-term policy also pays 50-60% of your earned income when you are unable to do your job.
Premiums are based on age, occupation, and annual gross income, but are again typically 1-3% of your earned income.
Many employers do not offer plans, so you may need to self-purchase a plan. If an employer does offer a plan, it may not give the coverage you need, so acquiring a supplemental policy like AFLAC may provide more adequate financial coverage.
Policies are usually valid for 2-5 years, or until age 65.
Benefits will end when your policy coverage period concludes, when your predetermined time period is over, or when you return to work.
If you are unable to return to work when a long-term policy terminates, a transition to Social Security Disability may be necessary.
What Are the Basic Types of Long-Term Policies?
There are 2 basic types of long-term disability policies: Own-Occupation insurance and Any-Occupation insurance.
Own-Occupation disability insurance defines a disability as an inability to work at your present occupation, even if you can work at another. For example, consider you are a truck driver but experience an illness that results in vertigo and partial blindness. You are no longer able to drive due to these issues. An own occupation disability would provide coverage for your inability to work in your present job—truck driver.
Any-Occupation disability insurance covers you if you are unable to work at any occupation. In the example of the truck driver, an any-occupation policy would unlikely offer payment for job loss. While you may no longer be able to perform your normal daily work of driving, an any-occupation policy would consider you still employable as perhaps a dispatcher or some other non-driving position.
Ultimately, the own-occupation policy is more desirable since if you were to become disabled in any way, you would only need to show an inability to work in your present job, which can be easier to prove. These policies, however, are more expensive, or they just may not be offered through your plan.
An any-occupation policy is more common, is more affordable, but is sometimes harder to prove. If you were to become disabled, you would need to show that with your skillset and (lack of) ability you are unable to do any other kind of job, regardless of what your employment was at the time of your injury or illness. For the above example, it may be difficult to prove the truck driver is unable to do any other kind of work.
Should I Pay Premiums Using Pre-Tax or Post-Tax Dollars?
Deciding whether you should pay short- and long-term disability policies with pre- or post-tax dollars is a complicated equation. Basically, if you pay for a disability with pre-tax dollars, the taxes would be saved by you immediately, but would be taken out when you receive payouts from the policy; likewise, if you pay for a disability policy with post-tax dollars, you will see less realized income now, but your income would be greater upon the policy payout. Ultimately, you have to assess whether it is more important that you have additional money now by paying for the policy with pre-tax dollars, or later, by paying for the policy with post-tax dollars.
How Does Short- and Long-Term Disability Integrate?
A short-term disability policy typically offers coverage for 90-180 days, 3-6 months; the policy may have an elimination period of 0-14 days, in which case you would need to rely upon your employee benefits for financial stability. If you are unable to return to work when the short-term policy terminates, the long-term policy takes over at that 3- or 6-month mark, depending on the long-term policy rules. Long-term policies usually have an exclusion period of 90-180 days, about the length of the typical short-term policy. Once the long-term policy is active, the benefit duration is 2-5 years, or until age 65.
Will a Short- and/or Long-Term Disability Policy Provide Enough Income to Maintain My Current Standard of Living?
The hard answer to this question is no. Short- and long-term policies only provide up to 50-60% of your current income, so unless you are not using almost half of your income each year, the financial change will be felt.
Consider if a person (let’s call him Joe) is currently employed, earning $60,000/yr. but then becomes injured and must apply for his short-term disability policy benefits because he is unable to return to work. Before, Joe received $1150 weekly; with a short-term policy paying 60% of his salary, Joe will be reduced to $690 a week.
Luckily, Joe paid his premiums with post-tax dollars and will receive the full $690. Unfortunately, Joe does not recover, is unable to return to work, and his short-term policy is terminating. He must apply for his long-term disability benefits, which also pay 60%. However, Joe used pre-tax dollars to pay for his long-term policy, and thus taxes will be taken out of his payment. Joe is paid $690 weekly by his policy but 15% taxes are taken out, so Joe instead receives $586 a week.
Effectively, Joe’s disability and his inability to return to work have, in a matter of months, reduced his realized income from $1150 to $586 a week. Unless Joe has considerable savings or another form of unearned income (stock, for example), Joe would unlikely be able to maintain the lifestyle he enjoyed before the disability. This is the hard, grim truth. However, consider if Joe failed to secure short- or long-term disability policies, and instead of $586 would receive $0. Joe would likely be seeking government assistance via Medicaid or considering Social Security Disability, which would pay even less than a short- or long-term policy, but, moreover, may take a year or more for approval (see “Disability Happens” BioMatrix News Summer 2021). Without the support of a short- or long-term policy, Joe would be without any income or financial support.
Ultimately, BioMatrix nor myself purport to be financial advisors regarding the economics of a disability. BioMatrix, however, is deeply vested in the sustained care of persons with chronic illness, and I, as a person with a chronic illness, am deeply vested in the sustained support for myself and others as we navigate the twists and turns of chronic illness and as we plan for the unexpected. So while on one hand it is heartbreaking to hear about persons confronting a disability, on the other hand, it is even more devastating when we hear about the dire financial straits the disability precipitated. Short- and long-term disability policies are support mechanisms to soften those financial losses.
Hopefully, this piece has you looking into those policies, reaching out to your employer about policy options, or picking up the phone to speak to a disability policy expert. While these policies may leave your financial glass only half full in the case of a temporary or long-term disability, that, I think, is a much better prospect than an empty glass.
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References
Council for Disability Awareness. “Chances of Disability.” Disabilitycanhappen.org.
15% figure gained by 51.2 disabilities out of 328.9 million Americans, 2019 Census stat.
Council for Disability Awareness. “Statistics.” Disabilitycanhappen.org.
