Comparing Short-Term and Long-Term Disability Plans

Disability income insurance is designed to provide periodic payments to an individual who is unable to work due to a covered sickness or injury. For the Accident and Health Insurance Exam, it is crucial to understand that these policies do not replace all of an insured’s income; rather, they replace a percentage of gross income to encourage the individual to return to work once they are able.

Disability insurance is generally categorized into two main types: Short-Term Disability (STD) and Long-Term Disability (LTD). While both serve the same fundamental purpose—income replacement—they differ significantly in their waiting periods, benefit durations, and typical payout structures. For a broader overview of related topics, see our complete Accident & Health exam guide and test your knowledge with practice Accident & Health questions.

Short-Term Disability plans are designed to provide immediate relief for temporary illnesses or injuries. These plans are frequently offered as group insurance through employers, though individual policies exist.

• Elimination Period: This is the "waiting period" between the onset of the disability and the start of benefit payments. For STD, this is typically very short, ranging from 0 to 14 days. Many policies have a "0-day" elimination period for accidents and a "7-day" period for sickness.
• Benefit Period: The maximum length of time the policy will pay benefits. STD benefit periods are usually 13, 26, or 52 weeks. It is rare for a short-term policy to exceed two years.
• Benefit Amount: STD policies typically pay a higher percentage of the insured's pre-disability income compared to LTD, often ranging from 60% to 80%.
• Definition of Disability: Most STD plans use the "Own Occupation" definition, meaning the insured is considered disabled if they cannot perform the duties of their specific job.

Long-Term Disability plans are intended to protect against catastrophic illnesses or injuries that prevent an individual from working for extended periods or for the remainder of their working life.

• Elimination Period: The elimination period for LTD is significantly longer than for STD. It usually lasts 30, 60, 90, or 180 days. In many group settings, the LTD elimination period is designed to end exactly when the STD benefit period expires.
• Benefit Period: These plans offer coverage for much longer durations, such as 2 years, 5 years, until age 65, or even for life if the disability occurs before a certain age.
• Benefit Amount: LTD benefits usually replace 50% to 60% of the insured's gross income. While the percentage is lower than STD, the total payout over time is much higher due to the duration of the benefits.
• Definition of Disability: LTD policies often use a dual definition. For the first two years of a claim, they may use the "Own Occupation" definition. After that initial period, the definition often shifts to "Any Occupation," meaning the insured must be unable to perform any job for which they are reasonably suited by education, training, or experience to continue receiving benefits.

In the insurance industry, avoiding over-insurance is a primary goal. If an insured receives benefits from multiple sources, they might end up with more income while disabled than while working, which creates a moral hazard. To prevent this, disability benefits are often coordinated with other income sources like Social Security Disability Insurance (SSDI) or Workers' Compensation.

Taxation is another high-yield exam topic. The general rules are as follows:

• Employee-Paid Premiums: If the employee pays the premium with after-tax dollars, the benefits received are tax-free.
• Employer-Paid Premiums: If the employer pays the premium and deducts it as a business expense, the benefits received by the employee are taxable as ordinary income.
• Contributory Plans: If both the employer and employee contribute, the benefits are taxed in proportion to the employer's contribution.