Short-Term vs Long-Term Disability

Short-term disability (STD)

Coverage period: From the start of disability (after a brief elimination period, often 1–7 days) through 3–6 months.

Elimination period: Short. Typically 1 day for accident, 7 days for illness.

Benefit: Often 60–100% of base salary, depending on the policy. Employer-paid STD is sometimes 100% for a defined period.

Causes covered: Accidents, illness, pregnancy (in most plans — some plans have specific maternity provisions), surgery recovery, significant acute events.

Maximum benefit period: Usually 13, 26, or 52 weeks.

STD is designed to bridge shorter disabilities — recovering from surgery, a serious illness, childbirth, injury rehabilitation. It's usually offered as an employer benefit, sometimes at no employee cost.

Long-term disability (LTD)

Coverage period: After STD ends (or after a longer elimination period if no STD) through retirement age. Often "to age 65" or "to age 67," though some policies offer shorter terms or even lifetime benefits.

Elimination period: 90 or 180 days is standard. Longer elimination periods substantially lower the premium — if you have 6 months of emergency fund, 180-day elimination is affordable and significantly cheaper.

Benefit: 60–70% of base salary is typical. Higher-end policies can replace more; some replace bonuses and variable compensation.

Causes covered: Any qualifying disability under the policy's definition — physical conditions, mental health conditions (often with limitations), chronic illness.

Maximum benefit period: Most commonly "to age 65" (or 67), but shorter options exist (2, 5, 10 years) at lower premium.

LTD is the insurance that matters most for long-term financial protection. A 15-year disability could destroy a retirement plan; LTD prevents that.

How they fit together

A common employer benefits structure:

1. Sick leave / PTO: covers days 1–5.
2. STD: kicks in day 6 (or 8 or 14), pays 60–100% until day 90 or 180.
3. LTD: begins day 91 or 181, pays 60–70% to retirement age.

Gaps between the layers are filled by savings (emergency fund). Some people use longer STD elimination periods and longer LTD elimination periods to lower premiums if they have sufficient savings.

Critical differences

Mental health coverage. LTD often has a 24-month lifetime limit on mental health disabilities, after which benefits stop even if the condition continues. STD typically covers mental health like any other qualifying cause during its short period.

Definition of disability. STD typically uses a clear "unable to perform material duties of your job" definition. LTD definitions vary widely — "own occupation" vs "any occupation" becomes critical for long-duration disabilities.

Premium cost. STD is cheap because average claims are small. LTD is more expensive because a long-duration claim can pay out for decades.

Tax treatment. Both follow the same rule: if premiums are paid with pre-tax dollars (or by employer), benefits are taxable. After-tax premiums produce tax-free benefits. A 60% benefit that's taxable often comes out to 42% net income; 60% tax-free is 60% net.

Prioritizing your coverage

If you have to choose between STD and LTD, choose LTD. Here's why:

• Duration risk matters more than frequency risk. A 3-month disability is unpleasant but financially manageable (emergency fund + short-term savings). A 10-year disability is catastrophic without insurance.
• STD can be partially self-funded. An emergency fund of 3–6 months essentially acts like STD coverage for the elimination period needed to access LTD.
• LTD benefits compound. A 5-year disability at age 35 costs you not just 5 years of income but also the retirement savings you would have accumulated with compound growth.

For people building coverage from scratch: individual LTD first, then STD if cash flow permits.

Employer benefit gotchas

Employer LTD is typically:

• "Any-occupation" definition after 2 years.
• Capped at a specific dollar amount per month (often $10k–$15k max).
• Taxable if employer paid premiums (common).
• Tied to employment — change jobs, lose coverage.

For high earners, the cap issue is significant. A $300k-earner with a $10k/month cap has a replacement ratio of 40%, not 60%. Supplemental individual LTD fills this gap.

Partial and residual benefits

Modern LTD policies often include:

Partial disability benefit. If you can work part-time at reduced income, benefits are reduced proportionally rather than eliminated.

Residual disability benefit. If you return to work but at reduced earnings (loss of clients, slower pace), benefits continue based on income loss.

These are valuable riders. Disability often isn't all-or-nothing — a back injury may let you work 20 hours a week but not 50. Partial/residual benefits preserve coverage in that situation.

When STD alone is enough

A few scenarios where individual LTD may be less critical:

• Close to retirement with adequate savings. A 60-year-old with a fully-funded retirement doesn't need 20 years of income replacement.
• High assets relative to income. Someone with $5M in assets earning $200k can self-insure disability more easily than someone with $100k assets earning $200k.
• Dual-income couples where one income alone is sufficient. If either spouse's income covers essential expenses, extended disability of one partner is manageable.

For most working-age people with dependents, LTD is essential. STD is nice-to-have.

How Horizons uses this

Horizons models disability scenarios by reducing earned income and optionally adding disability benefit income at the appropriate benefit percentage. The net impact on the plan reveals whether your coverage is sufficient or whether gaps exist in your long-term protection.