Short-Term Disability Insurance a Safety Net for Workers

by Monica Steinisch

Introduction

Upon hearing his story, one has to wonder if Michael Burdette, an Atlanta-area police sergeant, makes it a point to walk under ladders, break mirrors, and open umbrellas inside the house.

Burdette's year of bad luck began in April 2005, when a car rear-ended his at a stop sign. Six months later he was rear-ended again. In January 2006, Burdette suffered a detached retina when a suspect threw a large rock at him. Two months later he was rear-ended again. And that April, he burned himself while dealing with a burning brush pile.

Each injury required Burdette to take time off work, and during each of those absences he received benefits—partial income replacement—under the terms of the short-term disability insurance policy he purchased from American Family Life Assurance Company, better known as Aflac, based in Columbus, Ga.

Though Burdette's string of accidents certainly would skew the results of any study on the subject, the National Safety Council estimates that there were 24,100,000 disabling injuries in 2005, or approximately 2,750 every hour. To be sure, not all of these injuries resulted in a long-term or permanent disability, but it's likely that many, if not most, led to at least some time away from work. A statistic like this should make every worker ask, Am I prepared for the financial challenge that even a few missed paychecks could present?

Understand purpose, features of STD insurance

Disability insurance replaces income lost as the result of an illness or injury. Short-term disability (STD) insurance is intended to fill the gap between when you first become disabled and the day private or government long-term disability (LTD) benefits begin, if your absence from work should extend that long.

Though all disability policies are similar in that they pay a percentage of your income while you are too sick or hurt to work, terms and features will vary. Knowing what to look for allows you to determine if your current coverage is adequate or, if you're shopping for coverage, to compare different policies.

Many additional terms and features will appear in any short-term disability policy, but you should consider at least these key items when evaluating coverage.

• Benefit amount: An STD policy will pay out a flat dollar amount or a percentage of your regular gross (pretax) income. The amount always will be less than 100% of your salary, generally in the range of 40% to 70%. (This provides employees an incentive to return to work as soon as they are able.) Some policies pay tiered benefits—more in the early part of the disability period and less in the remaining weeks or months. Benefits are taxable if your employer pays the premiums; they are not taxable if you pay the premiums with after-tax dollars. You'll pay a higher premium for a higher percentage of income replacement.

• Benefit period: The policy will specify how long you can receive payments—typically for 13, 26, or 52 weeks. The longer your benefit period, the higher your premium will be. A short-term disability policy should pay benefits until long-term disability coverage kicks in.

• Waiting period: It's common for benefits due to an injury to begin on the first day of disability. Benefits for a disability due to illness usually begin either seven or 14 days after you leave work. A policy that begins paying at seven days will be more expensive than one that begins paying at 14 days. Some policies require you to use some or all of your sick days before benefits begin.

• Covered disabilities: A disability can be just about any illness or injury that prevents you from working—from childbirth to a broken arm to pneumonia. Pre-existing conditions may be excluded. Or, they could be covered after a waiting period of some months. Job-related disabilities that workers compensation covers typically are not eligible for STD benefits unless the insured has purchased coverage for that purpose. Burdette, who suffered three of his five injuries while on the job, received benefits from Aflac through an "on-the-job disability" rider he purchased. (A rider is an attachment that alters the policy's coverage or terms.)

• Definition of disability: Generally, an STD policy will pay benefits for any sickness or injury that prevents you from doing your job—"own occupation." It is possible that the policy could define disability as an inability to work at "any occupation," which means that a forklift driver who still could answer phones would not be considered disabled if his employer could put him to work at the reception desk. Generally, policies with the "any occupation" definition are cheaper, but "own occupation/any occupation" is more commonly an issue in long-term disability insurance policies.

• Residual benefit: Some policies allow you to return to work part time while continuing to pay out benefits for the remaining hours. Some policies also allow you to return to work on a trial basis. If you try to go back to work but must leave again within the trial period, your benefit for that disability continues.

• Policy and premium changes: A noncancelable policy locks in your coverage and premiums for the life of the policy. A guaranteed renewable policy stays in force as long as you pay your premiums, but the insurance company can increase your premiums. As you might guess, a guaranteed renewable policy is less expensive than a noncancelable policy. Unlike an individual STD policy, group coverage, through an employer or association, may be dependent on your fulfilling certain requirements. For example, in some cases, you won't be eligible for coverage until you've been an employee or an association member for a certain period of time. This is referred to as the "service wait." There also may be an "active work" requirement that specifies you must work a minimum number of hours or days per week to be eligible for coverage.

Assess short-term disability needs and resources

The first step in assessing your STD insurance needs is determining how much money you need to cover your essential expenses each month. Essential expenses are those you must pay—your rent or mortgage payment, utilities, car loan, and food, for example. Determine which expenses, if any, could be cancelled or postponed for the weeks or months you are without a paycheck. These might include things like cable TV or gym membership dues.

Then determine what your financial resources would be while you were away from work. Take into account any accrued paid time off (such as sick leave or vacation), your spouse's income, and your emergency fund.

"Your emergency fund could be a combination of savings, a loan from your 401(k), and help from a relative," says Eric Tyson, author of "Personal Finance for Dummies" and "Let's Get Real About Money!" If you're a homeowner, you may be able to tap a home equity line of credit. While borrowing is not an ideal way to cover living expenses, a short-term loan could get you through an emergency if you haven't built up significant liquid savings.

Of course, you'd have to arrange your home equity credit line before your illness or disability occurs. Talk to a credit union loan officer for guidance.

Lastly, identify what, if any, STD and LTD disability coverage you have, and determine when benefits would begin and end and what the amount would be. Start by checking your benefits materials. Talk to your employer's HR (human resources) benefits manager or your association administrator if you need more information.

California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico have mandatory state disability insurance (SDI) programs. Various other disability programs provide benefits to government workers, members of the military, and union workers. Social Security does not pay short-term disability benefits. Workers compensation pays benefits on work-related disabilities only.

Now, put all the pieces together to see what benefits you'd receive before private or government long-term disability benefits kicked in. It is common for private LTD benefits to begin three months or six months after you become disabled. Would you have enough—between accrued sick leave, short-term disability benefits, your spouse's income, and your emergency fund—to pay your essential expenses?

According to Insure.com, an online information service for individual insurance shoppers, if you have enough in savings to last until you go to work again, you probably don't need to buy STD or an individual accident policy. If you don't have much in savings or any other income to fall back on if you were to become disabled, an individual STD policy is a wise option.

STD work, association policy cheaper, easier to get

If you're going to buy STD insurance, Tyson says the best place to buy it is through your employer or professional association, because group plans offer a better value than disability insurance you can buy on your own.

Even if your company doesn't provide fully paid STD coverage as an employee benefit, more and more employers are inviting insurers to offer individual policies directly to their workers at much lower rates than they would pay if they bought coverage on their own. A significantly lower premium is one of the major benefits of buying insurance through a group, whether it's an employer or an association.

Another big benefit is that employees who apply for coverage during open enrollment are not subject to medical underwriting, which means the insurance company cannot deny coverage based on a medical exam or pre-existing condition. If you don't sign up during open enrollment, coverage could be denied or modified based on the insurance company's findings during a review of your medical records.

If STD insurance isn't offered through your employer or association, or if you're not satisfied with the coverage and terms offered, an individual policy that you buy on your own may appear to be the solution. In fact, some issues make this option less attractive than you might expect.

• First, there's the higher cost. Coverage that might have seemed well worth the cost at, say, $38 a month under the group rate may not be as attractive at, say, $60 or more a month for an individual policy.

• Second, even if you're willing to pay the higher premiums on an individual policy, it can be difficult to qualify for the coverage you want because you will be subject to medical underwriting.

• Third, just finding someone who sells STD insurance directly to individuals can be a challenge.

  "There are only a few companies that offer disability on a direct basis," says Karen Riedel, a vice president and director of product marketing for Aflac. Neither her company nor any of the other largest short-term disability insurance companies in the country sell directly to individuals, except through the workplace.

Another, perhaps more attractive, option is to approach your employer about inviting a supplemental benefits provider to offer STD insurance directly to you and your coworkers. You'll get a better deal through the group even if you have to pay the full premium yourself. And these policies typically are portable—they go with you when you change employers—just like an individual policy you would buy from a broker.

MC Guenther, a spokesperson for Unum, a provider of employee benefits products and services based in Chattanooga, Tenn., explains that this can be a great way for an employer to offer voluntary benefits products without having to spend any money.

"[Supplemental insurance offerings] can be a bonus for workers that doesn't necessarily impact the employer's bottom line—unless the company wants to pay part or all of the premiums," says Guenther.

If you're self-employed, Guenther suggests trying to assemble your own group by finding other sole proprietors interested in buying STD insurance. Depending on the insurance company, you might qualify for group rates with as few as five people.

Long-term disability critical

One thing to remember, as you assess your short-term disability needs and resources, is that long-term disability coverage is an even more critical need.

"Having short-term disability coverage is certainly preferable to not having it," says Tyson. "But what becomes catastrophic, financially, is long-term disability."

If your employer or association offers neither paid STD nor paid LTD and you can't afford to purchase both, Tyson recommends devoting your limited disability insurance dollars to long-term coverage. And make establishing and building an emergency fund a top financial priority.

At last report, Burdette's luck appeared to be improving.

Resources

When choosing an insurance policy, check the issuing company's financial strength and stability online at Moody's, Standard and Poor's, or A.M. Best.

Research any prospective insurer's complaints record with the National Association of Insurance Commissioners. For more information about company complaints, contact your state insurance department.

The Insurance Information Institute works to improve public understanding of insurance through such channels as online information, Web videos, an Ask the Expert feature, printed materials, and more.

Disability Benefits 101 provides information about disability benefits available from various sources and available under different circumstances. Although some of the information is California-specific, much of the information on the site will be useful to everyone.

Insurance shoppers can get information, access reference tools, and request quotes for several types of insurance at Insure.com.

Published March 10, 2008

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