Many employers offer short-term and long-term disability insurance as part of their employee benefits program. Perhaps for this reason, when consumers look to purchase 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?
Following the basic principles of financial planning and risk management, insurance is generally recommended to protect against risks that occur infrequently but could create serious financial hardship when they do occur. Suffering a debilitating injury or illness is clearly a great example of such risk, which is why maintaining disability insurance is a responsible form of protection.
For many people, a single month’s loss of income could be the difference between meeting or not meeting current financial obligations. However, regardless of one’s current financial position, it is clear that a two-year loss of income would be significantly more serious than a two-month loss of income. While a one- or two-month loss of income may not be easy to bear, it may not necessarily create a serious enough financial hardship for which insurance is needed, especially if the amount of money that can be allocated to this insurance is limited. .
To put things in perspective, imagine a worker earning $5,000 per month – if you are disabled for 3 months, the total loss of earnings is $15,000. If that same person were disabled for 3 years, the total loss of earnings would be $180,000. Clearly, the financial impact and loss of income is much greater with long-term disabilities than short-term.
Most individual long-term disability insurance policies have a 90-day waiting period that must first be met before benefits begin to pay. Through the various ways of holding liquid assets, a person could self-insure during the three-month waiting period and maintain insurance to protect against the larger and more significant 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.