The basics of
short-term disability insurance

If you were to become disabled tomorrow and couldn't work for two or three months, would you have enough savings to cover your living expenses during that time? If not, you may want to consider short-term disability insurance.

According to the Council for Disability Awareness, three in 10 people entering the work force today will become disabled before retiring. Also, one in seven people can expect to be disabled for five years or more before retirement. Statistics like that make should make short-term disability insurance a vital piece of your overall financial plan.

What is STD?

Short term disability (STD) pays a percentage of your salary if you become temporarily disabled, meaning that you are not able to work for a short period of time due to sickness or injury (excluding on-the-job injuries, which are covered by workers compensation insurance). A typical STD policy provides you with a weekly portion of your salary — usually 50, 60, or 66 2/3 percent for 13 to 52 weeks, according to the "Short Term Disability Guide" issued by the Epic Life Insurance Co. Most STD policies have a "cap," meaning you receive a maximum benefit amount per month.

STD policies have a cap on the amount of time you can receive benefits — up to two years, according to the Insurance Information Institute (III).

The average premium in 2007 for a group STD policy was $197 per year, according to Drew King, president of JHA, a subsidiary of General Re Life Corp. STD insurance, which is most often purchased as part of a group at work, can be paid by either the employer or the employee. Group STD policies are "guaranteed issue," meaning you do not have to take a medical exam to buy coverage.

On the average, you can start receiving money from your STD policy within one to 14 days after becoming sick or disabled, according to JHA. The actual time for coverage to kick in depends on whether you suffer an illness or injury. If you suffer an injury, your benefits will be paid immediately. If you suffer an illness, it may take longer because there needs to be enough time to show that the illness is grave enough to be disabling.

For example, if you severely injure yourself by falling off a ladder at your house, your benefits would kick in immediately. However, if you suffer from a serious illness and can't go to work, your insurance may not kick in until eight days after you became ill. Also, your employer may have additional restrictions as to when your STD policy kicks in. For example, your employer may require you to use all of your sick days before you begin receiving payments from your STD policy.

You also may receive retroactive benefits if you have a condition that worsens over time. For example, let's say you have a cold and you took three sick days at work. If your cold evolves into pneumonia and you need to be hospitalized for three weeks, you would receive disability pay retroactive to your first sick day.

Who should buy short-term disability?

Individual STD policies are available only on a limited basis. Your best bet is to buy STD coverage through your workpace. Some insurers sell "accident policies" that will pay you money each month for a year if you are injured in an accident.

If you have enough in savings to last until you go to work again, you probably don't need to buy STD or an individual accident policy. However, if you do not have much in savings or any other income to fall back on if you were to become disabled, an individual STD policy is a wise option.