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, 3 in 10 people entering the workforce today will become disabled before retiring. Also, 1 in 7 people can expect to be disabled for five years or more before retirement. Statistics like that should make short-term disability insurance a vital piece of your overall financial plan.

What is STD?

Short-term disability (STD) insurance 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 40 to 65 percent of your pre-disability base salary, according to the Life and Health Insurance Foundation for Education. The National Association of Insurance Commissioners estimates that these benefits generally last between three and six months. Most STD policies have a "cap," meaning you receive a maximum benefit amount per month. STD policies also have a limit on the amount of time you can receive benefits — up to two years, according to the Insurance Information Institute (III).

The average premium in mid-2009 for a group STD policy was $207 per year based on a 76-person group, according to Drew King, president of JHA, a disability and group life reinsurance division of General Re LifeHealth. 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.

You can start receiving money from your STD policy with a waiting period of 0 to 14 days after becoming sick or disabled, according to the III. 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 of the need 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. 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. Let's say you have a cold and you took three sick days at work. If your cold evolves into pneumonia, hospitalizing you for three weeks and preventing you from performing your job duties, you could receive disability pay retroactive to your first sick day.

Who should buy short-term disability insurance?

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