Does disability insurance offer more value in the short or long term?

Many employers offer both short-term and long-term disability insurance as part of their employee benefits program. Perhaps for this reason, when consumers want to buy their own individual coverage, it’s common for them to look for both short-term and long-term policies – but which should be considered more important?

In accordance with the basic principles of financial planning and risk management, insurance is generally recommended to protect against risks that are uncommon but could potentially cause serious financial problems if they occur. Suffering from a debilitating injury or illness is clearly a good example of such a risk, and so keeping disability insurance is a responsible form of protection.

For many people, one month’s loss of income can be the difference between meeting or failing to meet current financial obligations. However, regardless of one’s current financial position, it is clear that a two-year loss of income is significantly more serious than a two-month loss of income. While a loss of income for one or two months may not be easy to bear, it may not necessarily create a serious enough financial hardship that insurance is required, especially if the amount that can be allocated to this insurance is limited.

To put things in perspective, imagine an employee who earns $5,000 a month – if he/she is incapacitated for 3 months, the total loss of income equals $15,000. If that same person were incapacitated for 3 years, the total loss of income would be $180,000. It is clear that the financial impact and loss of income are much greater with long-term disabilities than with short-term disabilities.

Most individual long-term disability insurance policies have a 90-day qualifying period that must be completed before benefits begin to be paid. Due to the different ways of holding cash, a person can self-insure for the three-month waiting period and remain insured to protect against the greater, greater risk of long-term injury or illness.

Ideally, someone who is unable to self-insure for the first three months should have short-term disability insurance to provide income replacement during the elimination period. However, in most cases, the amount of available cash flow that can be used for insurance is limited. In those cases, it may be best to consider protection against the more critical risk of long-term loss of income.

See also  Tired of expensive dental insurance? Look at the Patriot Dental Plan