Short-Term Disability Insurance vs. Long-Term Disability Insurance

To qualify for short-term disability benefits, an employee must be unable to do their job, as deemed by a medical professional. Medical conditions that prevent an employee from working for several weeks to months, such as pregnancy, surgery rehabilitation, or severe illness, can qualify to receive benefits. Since employers in most states must legally provide workers' compensation insurance to all employees, any injuries incurred on the job are typically covered under a workers' compensation policy and are therefore not eligible for short-term disability.

There can be exclusions for preexisting conditions or intentional and foreseeable injuries (such as those inflicted during the commission of a crime). While employees can qualify for time off under the Family and Medical Leave Act (FMLA) to care for a sick relative, most short-term disability policies would not provide benefits if the covered employee is not the one with the illness.

Depending on the policy, childbirth is generally covered under a short-term disability insurance policy. It provides a percentage of income over a certain period (e.g., 50% to 70% of income for 6 to 8 weeks after childbirth). Also note that usually, an employee can't collect short-term disability and paid family leave protection within the same period.

Once a claim is filed, there's usually a short waiting period — the elimination period — of 1 to 14 days before an employee can begin collecting benefits from the policy. The waiting period will be specified in the policy terms during signup. For most disability claims, the employee must provide a medical form signed by a doctor that details the illness or injury. The form asks for the first date of illness or injury, typically used as the beginning of the elimination period.

While benefit periods may vary across different providers, most short-term disability policies provide benefits for 3 to 6 months. Some policies, especially those connected with a long-term disability policy, may provide short-term coverage for an entire year. If an employee needs additional coverage beyond the initial short-term disability period, a long-term disability policy may be required to extend the benefits.

Income from a short-term disability policy may be taxable, depending on whether it was funded with pre-tax or post-tax income. Most employer-sponsored disability plans are paid on a pre-tax basis either directly from the employer or through payroll deduction from the employee (or a combination of both). In these cases, the insurance proceeds would be taxable, since taxes were not paid on the income used to fund the policy. In contrast, if an employee purchases a private disability policy outside the employer's benefits plan, this would be purchased with post-tax income, and the disability benefits would not be taxable.

The actual amount paid out in benefits on a short-term policy is typically 40-70% of the employee's earnings for the covered event period once the elimination period has passed. The employee may opt to deduct taxes from the benefits check (if applicable) to avoid a tax liability at the end of the tax year on any disability benefits paid.

Offering short-term disability is not optional for most businesses in certain states and U.S. territories, including:

• California
• Hawaii
• New Jersey
• New York
• Rhode Island
• Puerto Rico

Employees who must take a leave of absence from work have some form of leave entitlement under both short-term disability insurance and FMLA. But they each have their considerations, terms, and requirements.

One of the differences between short-term disability vs. FMLA is around an employee being paid within the duration of the leave. Short-term disability insurance provides wage replacement benefits. A person approved for short-term disability usually receives some percentage of their weekly earnings during their time away.

The requirements for qualifying for short-term disability are also different from FMLA's qualifications. For example, an eligible employee who works for a covered employer can take up to 12 weeks of unpaid leave under FMLA. The requirements for short-term disability are different. Depending on the policy, employees may only have to work for as few as 90 days to be eligible for short-term disability coverage. In some cases, the short-term disability benefit period can also last longer than FMLA time; some employers provide up to 12 months of disability coverage.

Short-term disability insurance and FMLA also differ in who is covered while away from work. Short-term disability generally only applies to injuries and illnesses suffered by the employee, while FMLA allows employees to take time away for certain family and medical reasons.

There are several reasons why an insurance company can deny short-term disability benefits:

• Lack of medical evidence: Employees must provide documentation from a medical professional that a medical condition or injury deems them unable to do their designated job. Incomplete or insufficient documentation can result in the claim being denied.

• Failure to meet eligibility requirements: Short-term disability benefits can be denied if the employee doesn't meet the criteria set by the policy, such as having worked for their employer for a certain period.

• Preexisting conditions: Some insurance companies exclude certain preexisting conditions. A claim can be denied if the employee's condition was present before being covered by the policy.

• Failure to follow treatment: Benefits can be denied if the employee doesn't follow the prescribed treatment plan for their medical condition.

• Lack of disability: The insurance policy will outline which medical conditions meet the definition of disability. A claim can be denied if a medical professional's diagnosis doesn't fit this definition.

• Fraudulent claims: This includes falsifying documents or misrepresenting a medical condition.

Many companies offer short-term disability insurance as part of their benefits packages, but several states and Puerto Rico mandate it:

• California State Disability Insurance Program

• Hawaii Temporary Disability Insurance

• New Jersey Division of Temporary Disability and Family Leave Insurance

• New York Short Term Disability

• Rhode Island Temporary Disability Insurance

• Puerto Rico Disability Benefits

Employees eligible to receive benefits under these state laws typically remain employed while collecting short-term disability benefits, but Rhode Island is the only state that includes job-protected leave as part of its program. FMLA or other state laws, such as the California Family Rights Act, may offer employees similar job protection.

The qualifications for long-term disability are usually more stringent than those for short-term disability. With short-term disability, benefits can be awarded if the employee cannot do their job. With long-term disability, benefits are typically only granted if the employee cannot do any job. What constitutes a qualifying event will be specified in the policy, so it is essential to understand when benefits may (or may not) apply before accepting a long-term disability policy.

Qualifying events may include chronic pain, cancer treatments, or debilitating illness or injury lasting more than 26 weeks (about 6 months). If an employee could qualify for another form of income replacement, such as Social Security Disability Insurance, the long-term disability policy will no longer provide benefits or have an off-set benefit.

Long-term disability benefits begin after the specified waiting period, and any coordinated short-term disability benefits have been exhausted. If an employer offers both short-term and long-term disability plans through a single insurance provider, the provider will usually pay out under the short-term disability plan to its maximum before applying long-term disability payments, even if the specified long-term waiting period is shorter. For cases where a short-term disability policy may not apply, the standard waiting period for long-term disability policies is three months.

Once long-term disability benefits have been approved, an employee can continue to receive benefits for the policy term or until they return to work. Common coverage durations are 36 months, although some can provide coverage for up to 10 years or even for the policyholder's life.

As with short-term disability benefits, long-term disability benefits may be taxable depending on how the policy is funded. If the policy is paid through a pre-tax payroll deduction, the employee will likely be liable for income taxes on any long-term disability benefits. The covered employee can also opt for taxes to be deducted as each benefits check is processed, or they can resolve any tax liability related to long-term disability benefits at the end of the tax year.

The most common elimination period for long-term disability is 90 days, but the exact terms of the elimination period will be specified in the policy. If short-term disability coverage is available, the effective waiting period before receiving benefits will be relatively short. However, when a short-term policy is unavailable, employees may have to wait several months with no income before qualifying for long-term benefits. Due to the extended elimination periods, many employees opt for both short-term and long-term disability coverage.

Like short-term disability, long-term disability can be denied for many reasons. Among the most common reasons are:

• The condition doesn't meet the policy's definition of a disability
• Not providing the insurance company with all the requested medical documentation, such as medical records, prescription records, and results from medical testing
• Not including a doctor's report detailing the individual's condition
• Having a condition not covered by the policy
• Missing deadlines for providing requested documents

Employers may offer long-term disability insurance as part of their employee benefits package. These policies must follow the Employee Retirement Income Security Act (ERISA) of 1974, which provides safeguards around employee benefits programs, including disability insurance.