How Does Short-Term Disability Insurance Work?

What is your most valuable asset?

Like most people, your home or your car may come to mind. After all, these are expensive things. But there is one asset that is worth even more — your ability to work.

If you were to lose this ability because of illness or injury, how would you support yourself and your family during this tough period?

Short-term disability insurance can help. It pays you when you are unable work due to disability.

Keep reading to find out more about short-term disability insurance coverage and how it works.

What is a Short-Term Disability?

Any medical condition that prevents you from working temporarily, from several weeks to months, can be deemed as a short-term disability. So, in effect, any illness or injury can be regarded as a short-term disability as long as it meets the ‘total disability’ definition. Each insurer, however, defines total disability differently and provides . So, you must check your policy to find out if your condition qualifies for short-term disability benefits.  

It is important to have a medical diagnosis to prove your short-term disability. Not only does it provide detailed information regarding your health, it will also outline a comprehensive treatment plan. Life insurers are unlikely to approve a short-term disability claim without a medical diagnosis from a relevant registered practitioner.

For instance, if you make a claim for burnout, stress, or pregnancy, the insurance company may reject it.

Burnout or stress may not been deemed as satisfactorily meeting the criteria for a medical diagnosis for disability. However, in some cases, a medical diagnosis of depression that is severe enough to prevent you from being able to function properly in your workplace, may be approved.

Pregnancy is not regarded as a disability, but you may suffer from pregnancy-related complications that can prevent you from performing the main tasks of your profession. In which case, your claim may be approved.

Here is a list of common health conditions that may qualify for short-term disability benefits:

• Bipolar Disorders
• Back Problems
• Carpal Tunnel Syndrome
• Cervical Disorders
• Chronic Fatigue Syndrome
• Chronic Pain
• Crohn’s Disease
• Complex Regional Pain Syndrome
• Depression
• Fibromyalgia
• Heart Disease
• Migraine and Tension Headaches
• Irritable Bowel Syndrome (IBS)
• Lupus
• Knee Disorders
• Lyme Disease
• Multiple Sclerosis
• Sleep Disorders
• Psoriatic Arthritis
• Visual Disorders
• Vestibular Disorders

What is Short-Term Disability Insurance?

Short-term disability (STD) insurance covers you for loss of income in the event of a disability. The disability may be due to an illness, an injury, or a psychological disorder.

Usually, STD plans provide coverage for three to six months. But some plans may offer benefits for shorter or longer durations. Generally speaking, these policies pay 50-85% of your income. Your STD policy will kick-in only after you have exhausted available leave options (such as sick leave), if you are employed.  

Many Canadian employers offer STD insurance as part of their employee benefits program. However, if your employer does not offer one or the plan is not adequate to your needs, you can buy a STD insurance policy on your own.

While each STD insurance plan is different, they usually spell out the following information:

• How much benefit you will receive (generally, it is between 50-85% of your income)
• The maximum amount the insurer will pay (STD policies have a pre-determined monthly limit)
• How the insurer defines ‘disability’
• How long the benefits are payable
• Any exclusions or limitations that can prevent you from qualifying for benefits (for example, pre-existing medical conditions)

Let’s now look at some of the common questions people ask about short-term disability insurance and their answers:

When do short-term disability benefits start?

Once you file a claim, you will likely have to wait a short period before your short-term disability coverage benefits become payable. The duration of this period — known as the waiting period — often varies by the insurer. Generally, the latency period is between one to 14 days. Check the policy details to know how much time you need to survive after filing a claim to receive the short-term disability benefits.

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How long does short-term disability last?

The benefit periods vary across different insurers. Generally speaking, these policies provide payments for three to six months. However, there are plans that offer benefits for only 30 days, as well as those that issue payments for a full year. After the benefit period, if you are still unable to work, you might switch to a long-term disability policy, assuming you have one.

How much does short-term disability pay?

Again, this is something vary from one policy to the next. Usually, STD insurance replaces 50-85% of your income. But some policies cover up to 100% of your income. Keep in mind though that STD plans have a cap on the maximum amount they pay out in a month.

As said earlier, many Canadian employers offer group STD policies to their workers. If available, do not hesitate to take advantage, but you still might need an individual policy.

If your employer-sponsored STD policy covers a large portion of your pay (like 75%), you may have sufficient protection. However, also take into account the monthly limit of your plan. A low monthly limit — say, $2,000 or 3,000 — could mean you will not have enough protection to meet your basic needs, even if the policy pays 75% of your income.  

How often does short-term disability insurance pay?

This is another aspect that can vary. Some policies issue monthly payments, some pay each week you miss work, and others pay once every two weeks.

How does short-term disability insurance work?

STD insurance works pretty much the same way as any other insurance product. When a qualifying event happens, you can file a claim after you have exhausted all available sick leaves.

You can start by filling the relevant forms and submitting them to the insurer. Generally, these three forms are needed:

• The Notice of Claim
• The Attending Physician’s Report
• The Employers Report

The insurer will review your claim application and request additional information, if needed. If everything is in order, you can expect the claim to be processed within a few days.

Are short-term disability insurance payments taxable?

That depends on whether the plan was funded with pre-tax or post-tax income. Generally, most employer-sponsored plans are paid on a pre-tax basis. In these cases, the payments received would count as taxable income because taxes were not paid on the dollars used to fund the plan.

Difference between short and long term disability insurance

Long-term disability insurance provides you with a steady stream of income to help you cover the loss of income due to a disabling accident or a prolonged illness.

Many employers offer long-term disability insurance to their employers, though you can buy an individual policy too. In fact, you may require both because employer-sponsored plans often fail to provide enough coverage.

Long-term disability insurance generally costs around 1-3% of your salary. Just like short-term disability, there is a waiting period that you need to survive to receive benefits. This period may vary from one insurer to the next, but it is rarely less than 90 days.

Now, let’s look at the main differences between long-term and short-term disability insurance.  

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Benefits of short-term disability insurance

STD insurance provides crucial income replacement if you are unable to earn a paycheck temporarily due to illness or injury. If your employer offers a STD plan, you should sign up for it without hesitation because these plans are usually free or subsidized.

An STD policy can help ease financial strain that comes with an illness, injury, or accident that prevents you from earning an income. Ask yourself — would you be able to pay your monthly bills and maintain your current lifestyle if you were unable to work for two, three, or six months?

If no, STD insurance is a good option.

Conclusion

Short-term disability insurance covers loss of income when you cannot work because of injury or illness. It usually provides benefits (usually 50-85% of your salary) for up to six months. Many Canadian employers offer short-term disability coverage for free or at reduced rates.

If your employer provides this benefit, sign up for it without hesitation. If it does not or the employer-sponsored coverage is not sufficient, you may consider putting an individual plan in place.

Dundas Life works with the top Canadian insurers and can help you find a short-term disability insurance policy that is both affordable and adequate for you.