Do You Need Short-Term Disability Insurance?

young woman in a neck brace at the hospital

The following is presented for informational purposes only.

A minor eye injury that puts you out of work for a month. You get into a fender bender and endure a string of surgeries, which requires six weeks to heal. How will you be able to cover your bills if you’re unable to rake in any money?

Should you fall ill, become diagnosed with a medical condition, or get into an accident and aren’t able to work for awhile, short-term disability can replace some of your income until you’re back on your feet.

“Short-term disability is important because it can protect your savings and investment accounts in the chance that you are temporarily unable to work due to a disability,” says Ben Smith, founder and financial planner of Cove Financial Planning. “Without coverage, many people are forced to take on debt, draw on their cash reserves, or worse, their retirement savings, in order to pay bills and living expenses in an instance where they are not earning an income due to a disability.”

Not having coverage in case you’re unable to work can cost you dearly.

Here are some instances when you should consider getting short-term disability:

If You’re Self-Employed

If you work for yourself or have a small number of employees, you’ll definitely want to consider getting short-term disability insurance. “Doctors, veterinarians, CPAs, and similar professionals who have their own practices are often self-employed and may not have the coverage, and also may be earning high incomes that lead to expensive month-to-month lifestyle costs,” says Ian Bloom, a CFP® and Financial Life Planner for Nerds. “In some cases, a disability would exhaust their savings rather quickly.”

You’ll also want to consider short-term disability insurance if you’re a full-time freelancer. Freelancers don’t get sick leave or get coverage through an employer. So if they’re unable to work, and their cash flow takes a halt, it could put them in financial peril.

You Don’t Have Enough in Savings

It might be okay to forego short-term disability coverage if you have six months worth of income in savings, as well as a considerable cushion beyond that, points out Bloom. When figuring out whether you have enough in savings to cover your living expenses when you’re disabled, keep in mind that if a disability occurs, you'll likely have medical expenses — doctors’ visits, treatments, medication — in addition to your regular monthly expenses.

On the flip side, let’s say you have a large cash reserve. In that case, you might not need short-term disability. “This means that they may be able to "self-fund" a potential temporary loss of income during a disability,” says Smith. And if your spouse or partner has a high-income job, and they can cover household expenses for a short time, you may not necessarily need to be covered with short-term disability.

“Every situation is different, so it's important to learn about your unique options and needs,” says Smith.

Your Employer Doesn’t Offer It

If your employer doesn’t offer short-term disability, it might be worth looking into. And even if your employer does offer short-term disability insurance, it might not be enough for your potential financial needs. To gauge this, review the coverage amounts and terms with your employer. You’ll also want to assess what your current living expenses are, and tack on additional expenses for medical treatment.

Tips for Shopping for Short-Term Disability

A few pointers if you’re thinking of hopping on a short-term disability plan:

Look for coverage through your employer. You might be able to get greater coverage through your current employer, which is typically less expensive than buying a private plan, explains Smith. What’s more, it’s usually easier to get coverage through a group plan.

See if the state you live in offers short-term disability. Only five states in the U.S. offer short-term disability: California, Hawaii, New Jersey, New York, and Rhode Island. The coverage amounts and time periods vary. Even if you live in a state that offers it, you might still want to get additional coverage to make sure you have enough to live on should you need it.

Check the elimination period. An elimination period is the amount of time you must wait until your insurance coverage kicks in. For example, a 14-day elimination period means you must wait 14 days after you become disabled before receiving any benefit from the plan. Elimination periods for short-term disability are usually are typically 7 or 14 days, while some might be up to 30 days. “In most cases, the longer the elimination period, the lower the cost of insurance will be,” says Smith.

And even if you hop on a short-term disability plan, you could still need some cash reserves to cover your expenses until the elimination period ends.

If you would like help assessing your financial needs, Money Management International (MMI) can help. To assist you in making the most informed choices for your financial situation, check out our webinars (which are free and open to the public) and in-person financial education workshops.

Tagged in Insurance, Managing medical bills and debt

Jackie Lam is an L.A.-based personal finance writer who is passionate about helping creatives with their finances. Her work has appeared in Forbes, Mental Floss, Business Insider, and GOOD. She blogs at heyfreelancer.com.

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