Table of contents
When it comes to short-term vs long-term disability insurance: which is better? Which one should you get if you’re looking for disability income insurance?
In this post, we explain:
- What long-term disability (LTD) and short-term disability (STD) insurance are
- What is the difference between the two types of coverage
- If you don’t have group coverage through work, which individual disability policy you should get on your own
So if you’re confused about the two different types of disability insurance policies, read on for more information about the role they play in protecting your financial plan.
What Is Short-Term Disability Insurance?
Short-term disability insurance replaces a portion of your income if you become disabled. The disabling event can be either an injury or illness. It pays you a weekly benefit to protect your income. This helps cover your everyday expenses are covered while you can’t work.
How to qualify
If you suffered an injury from an accident or have an illness that prevents you from doing the tasks of your job, you can qualify for STD benefits.
Waiting period
Before collecting disability benefits, you must satisfy the waiting period, also known as the elimination period. This can range from 0 to 14 days, with benefits usually starting on day 0 for an accident and day 14 for a sickness.
Benefit period
Because it’s meant for income replacement over the short term, STD insurance doesn’t last forever. In fact, most disability benefits last for only 26 weeks. If you’re still disabled after this, you’ll need another source of income replacement, as we’ll get to in the next section.
Benefit amount
The benefit amount also varies. It’s common for the insurance company to pay a weekly indemnity of 40% to 75% of your weekly earnings, up to a maximum amount.
Where to buy
In Canada, you can’t buy your own short-term disability insurance policy. Instead, insurance companies provide coverage through a group benefits plan from your employer or professional association.
Taxation
If your employer or association pays for your STD benefits, the premium isn’t added to your income as a taxable benefit. However, if you do go on a disability claim, the benefits will be taxable.
On the other hand, you will receive tax-free payments if you pay for the short-term disability benefits via payroll deductions.
What Is Long-Term Disability Insurance?
If your illness or injury lasts longer than half a year, short-term disability benefits won’t help you. That’s where you need to rely on an LTD benefit for income replacement. Instead of paying weekly benefits like with STD, you get paid monthly with LTD benefits.
How to qualify
Eligibility is similar to an STD claim. First, you must have an injury or illness that prevents you from doing your job.
Next, the impairment must meet the definition of a total disability. There are three common ones for LTD insurance plans.
- Own occupation: This definition means you can collect benefits if you’re disabled in your job, even if you’re working in another profession.
- Regular occupation: With this definition, benefits stop if you work in another field.
- Any occupation: The most restrictive definition of the three. Benefits stop if you can do another job for which you’re qualified based on your training, education, and experience, even if you’re disabled in your job.
Waiting period
For LTD insurance, the elimination period is measured in days. You’ll commonly find waiting periods of 90, 120, or 180 days. If you’re covered by group insurance that includes STD, LTD benefits should begin when STD benefits end.
Benefit period
LTD benefits last for at least two years and at most until age 65. Other benefit periods include 3, 5, and 10 years. Longer benefit periods mean you are more protected from a permanent or long-term disability.
Benefit amount
Like STD, LTD benefits replace a percentage of your income. This ranges from 50% to 75% of your monthly earnings, up to a maximum of $10,000 for employer-sponsored plans. With a personal long-term disability insurance policy, the maximum increases to $25,000.
For some employer-sponsored disability plans, you might encounter graded schedules. This means you get a different percentage based on your income level. For example, you might receive 60% of the first $5,000 of monthly earnings and 45% of the balance. So if you made $8,000 per month, you would get $4,350 in monthly disability benefits.
Finally, some group disability coverage offers a flat amount like $2,000 per month.
Where to buy
Unlike STD, you can buy an individual LTD insurance policy on your own. For Canadians who don’t have disability coverage through their employer or are self-employed, buying individual disability insurance policies is the only way to get LTD benefits.
With rising costs of disability claims, employers have started reducing benefits from these policies. To save on insurance premiums, some employers don’t even provide LTD coverage for their employees.
Taxation
Like STD, employer-paid long-term disability benefits are taxable. That’s because premiums are tax-deductible. However, if you pay for the coverage yourself, you can get the disability benefits tax-free.
As for an individual disability policy, since you pay for it with your after-tax income, any disability claim payout will be tax-free.
What Is The Difference Between Short-Term And Long-Term Disability Insurance?
Now that you know how these disability plans work, here is a table summarizing the difference between long-term and short-term disability insurance:
Short-term disability insurance | Long-term disability insurance | |
|---|---|---|
How to qualify | Suffer an injury or illness that prevents you from doing your job | Suffer an injury or illness that prevents you from doing your job |
Waiting period | 0-14 days | 90 to 180 days |
Benefit period | Up to 26 weeks | Up to age 65 |
Benefit amount | Up to 75% of your weekly earnings | Up to 75% of your monthly earnings |
Where to buy | Provided by group benefits plan | Either provided by group benefits plan or purchased individually |
Taxation | Benefits are taxable if your employer pays for it and non-taxable if you pay for it | Benefits are taxable if your employer pays for it and non-taxable if you pay for it |
Which is better: short-term or long-term disability insurance?
To answer that question, you have to think about your potential earnings over the short and long term. While it’s true that you could end up losing tens of thousands of dollars over the short term, a long-term disability could result in lost wages in the millions of dollars.
Besides, you can self-insure for a short-term disability by building up an emergency fund. A robust emergency fund should be able to pay for your living expenses for up to 6 months.
For that reason, a long-term disability plan is much more vital to your financial plan than short-term disability coverage.
Do you need both short and long-term disability insurance?
While the impact of a short-term disability shouldn’t be overlooked, it pales compared to the financial devastation of a long-term disability. If you had to choose one, long-term disability insurance is the type of disability policy to get.
Besides, the EI sickness benefits provided through the federal Employment Insurance program adequately replace an STD disability insurance policy.
With EI sickness benefits, you receive up to $595 per week for up to 15 weeks if you can’t work for medical reasons. While employees are automatically enrolled in the EI program, self-employed individuals must register and pay for coverage.
If you don’t have EI sickness benefits, you may be eligible for paid sick leave from your workplace. Many provinces are now creating a mandatory paid sick leave that should help reduce the financial strain of an injury or illness.
Can you have long-term disability insurance without short-term disability insurance?
Yes, you can.
With most employer-sponsored disability policies, you get both LTD and STD insurance. However, many people don’t have access to group disability income insurance. These include:
- Employees where employers don’t offer group coverage
- Self-employed workers
- Business owners
- Contractors
These individuals can’t buy individual short-term disability benefits. As a result, they would only have long-term disability benefits if they purchased it privately.
Can you go from collecting short-term disability to long-term disability benefits?
Yes, you can.
Employees who started with a short-term disability claim can seamlessly transition to a long-term claim. The fact that the same insurance company administers the insurance claim makes the transition process much more straightforward.
Is long and short-term disability insurance worth it?
Since you can’t buy STD insurance, the question is really asking about LTD insurance. The cost of LTD policies depends on many factors, like your occupation, gender, age, and plan design. In general, you should budget around 3-5% of your annual income for the premiums.
So is disability insurance worth it? When you consider how important your ability to make a living is, this is a small price to pay to protect it from an injury or illness.
Ready To Apply For Long-Term Disability Insurance?
As you can tell, an LTD insurance policy is much more indispensable to your financial plan than STD coverage. While a short-term injury or illness can tangibly affect your life, a long-term disability has the potential to leave your finances in ruins.
That’s why you need a long-term disability policy that can protect you in case of a long-term insurance claim. We work with the top disability insurance companies in Canada so that we can get you the best disability income policy, no matter your job or occupation. Best of all, you can customize your individual coverage to fit your budget and needs.
Call us today at 604-928-1628 or email us at info@briansoinsurance.com today for your free long-term disability quote.
Get Your Disability Insurance Quote Now
While we make every effort to keep our site updated, please be aware that timely information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Brian So Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser. This post is a brief summary for indicative purposes only. It does not include all terms, conditions, limitations, exclusions, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details which can be provided upon request. In case of any discrepancy, the language in the actual policy documents will prevail. A.M. Best financial strength ratings displayed are not a warranty of a company’s financial strength and ability to meet its obligations to policyholders.
