Short and Long Term Disability Insurance
Short- and long-term disability insurance forms an important part of many individual financial plans. Designed as income replacement during periods when you can't work due to illness or injury, disability insurance is often offered by employers but is also widely available on the private insurance market.
This hub offers an overview of how each type of disability insurance is used and administered. I cover the application of short-term disability insurance to pregnancy and maternity leave separately. The issue can be particularly complex given the multiple laws that come into play.
Personal Finance Resources
Short-Term Disability Insurance
The Basics of Short-Term Disability
Short-term disability insurance (STD) covers periods when you can't work that range from 3 to 6 months, depending on the terms of the policy. The benefit is expressed as a percentage of your pay rate at the time of disability and can range anywhere from 60-100%. So if you earn $4000 per month at your employer and the STD plan has a 70% benefit, you will get $2800 when out on STD.
Many employers offer short-term disability insurance plans. Sometimes the company pays for the coverage; in other cases, you will have to pay the premiums out of your paychecks. Your premium will commonly be based on your salary, so the more you earn the more you pay.
A few states, such as New Jersey and California, have state administered short-term disability programs under which employers must either pay into the plan or offer an equivalent private policy. Most don't have this level of coverage but do regulate disability policies sold in the state.
Short-Term Disability Claims
Some employers have a self-insured plan, meaning they pay any benefits directly out of company funds. In these situations, any STD claims will likely be paid through the regular payroll process. But in most cases an insurance company is involved in approving and paying claims. In either situation, the employer or the insurance company will have the right to ask for a second medical opinion to evaluate your disability.
Good medical documentation is important for any disability claim, so pay attention to what is required and work closely with your doctor to get everything submitted on a timely basis. Make sure a family member or friend knows how to contact your employer or insurance company to file the claim in case you are too ill to do so yourself.
As mentioned above, individual short-term disability policies are available from a number of insurance company. Get several quotes and have a list of key provisions so you can easily compare your options. Policies can vary a lot depending on your location, profession, age, salary level, and medical conditions covered. Read the provisions carefully so you know what you're buying.
Long-Term Disability Insurance
The Basics of Long-Term Disability
Long-term disability insurance (LTD) is for extended periods of disability beyond what a short-term disability policy covers. The benefit usually kicks in 6 or 12 months after the first date of disability. Many employer plans are designed so the LTD coverage starts when the STD benefits end. The most common levels of income replacement for LTD are 60% and 66% (two-thirds).
Long-term disability policies are purchased through insurance companies and are quite inexpensive for group plans. Many employers simply pay for the LTD coverage at no cost to the employee. In some situations, the employer will pay for a base plan - perhaps a 60% replacement benefit - and allow employees to buy additional coverage through payroll deductions.
Long-Term Disability Claims
If you have an employer-based policy, you will probably work with the benefits staff to start the application process, but most of your interaction will be with the claims department at the insurance company. Your application will be scrutinized closely, so make sure your medical documentation is complete and supports your claim. Don't ignore any requests from the insurance company for more information or your claim could be automatically denied after a certain period of time.
You will probably also be required to apply for Social Security Disability Insurance (SSDI) as part of the process of applying for LTD benefits. Getting approved for SSDI can be valuable down the road because you will potentially be eligible for Medicare before your normal retirement age. If approved for SSDI, your LTD payments will be reduced unless the policy states otherwise.
As with short-term disability insurance, LTD is available on the individual insurance market. Similar caveats apply concerning getting multiple quotes and understanding the terms of each policy. Note that it's very common with any disability insurance for there to be a cap on how much of your salary will be taken into consideration when determining your benefit amount. So high wage earners should pay particular attention to any such limits.
Also consider asking for a discount if buying multiple lines of insurance. Bundle together your life insurance, LTD, and STD, and you might save a decent percentage.
Pregnancy and Maternity Leave
Under the Pregnancy Discrimination Act of 1978, pregnancy and maternity leave claims are entitled to the same benefit levels as any other disability. This means that if you have a short-term disability policy - group or individual - your pregnancy and maternity leave are supposed to be covered and cannot be specifically excluded. Medically-recommended bed rest is included.
How much time you are entitled to under the STD policy is usually guided by state law. Common benefit periods are
- Vaginal/natural delivery - 6 weeks
- Cesarean delivery - 8 weeks
But check with your employer, insurance company, or state insurance board to verify what you are entitled to.
Pregnancy and maternity leave are also covered under the Family and Medical Leave Act (FMLA) if you qualify. Under FMLA, you can get 12 weeks of leave, but the law does not require the leave to be paid. So you must look to your employer's policies to make this determination.
Assuming that you have a short-term disability policy, you should be paid for the relevant disability period under that plan. The remainder of your leave might be any combination of sick, vacation, personal, and unpaid time, depending on your employer's policies. Some organizations have a specific parental leave policy that applies to both mothers and fathers that can be used to take paid time without having to use other forms of leave.
Consult with your Human Resources department if planning a pregnancy so you understand what benefits are available. Given the complex mesh of federal and state law with employer benefit plans, there will be a lot of variation from company to company.