Short-Term vs Long-Term Disability Insurance

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Short-Term vs Long-Term Disability Insurance for Employers -- Hollowtree blog

The Two Types of Disability Insurance Employers Need to Understand

Disability insurance replaces a portion of an employee's income when illness or injury prevents them from working. There are two distinct types, and most employers need both.

Short-term disability (STD) covers the initial weeks or months after a disabling event. Typical STD policies have elimination periods of 0-14 days and provide benefits for 13-26 weeks. Benefit amounts usually replace 60-70% of pre-disability earnings.

Long-term disability (LTD) picks up where STD leaves off, covering extended disabilities that last months or years. LTD policies typically have elimination periods of 90-180 days and can provide benefits until age 65 or for a specified number of years. Benefit amounts usually replace 50-60% of pre-disability earnings, with monthly maximums ranging from $5,000 to $25,000 depending on the plan design.

Why the Distinction Matters

The Council for Disability Awareness reports that more than one in four 20-year-olds will experience a disability lasting longer than 90 days before reaching age 67. The Social Security Administration processes roughly 2 million disability claims annually, approving only about 30% on initial application.

Without employer-provided coverage, employees face a gap between their last paycheck and any potential Social Security Disability Insurance (SSDI) benefits, which average just $1,537 per month in 2025. To understand how SSDI compares to group and individual disability insurance, review our detailed comparison in SSDI vs. private disability insurance. That gap can last months or years and often leads to financial devastation.

Elimination Periods: The Critical Design Decision

The elimination period is the waiting time between when a disability begins and when benefits start paying. This is the single most important cost-lever in disability plan design.

For STD, shorter elimination periods (0-7 days for illness, 0 days for accidents) provide immediate support but cost more. Longer elimination periods reduce premiums but leave employees exposed during the waiting period.

For LTD, the standard 90-day elimination period aligns with a 13-week STD plan, creating seamless coverage. Extending the LTD elimination period to 180 days reduces premiums by approximately 15-20% but creates a coverage gap if your STD plan runs out at 26 weeks.

The optimal approach is to coordinate STD and LTD elimination periods so there is no gap in coverage. If STD pays through week 13, LTD should activate at day 91.

Tax Implications That Affect Plan Design

How disability premiums are paid directly affects how benefits are taxed.

When the employer pays premiums and deducts them as a business expense, benefits received by the employee are taxable as ordinary income. This means a 60% benefit replacement rate effectively becomes 40-45% after taxes.

When employees pay premiums with after-tax dollars (through payroll deduction), benefits are received tax-free. This makes a 60% replacement rate truly 60% of pre-disability income.

Many employers use a shared premium arrangement: the company pays the LTD premium and employees pay the STD premium with after-tax dollars. This provides a tax benefit to the company while giving employees tax-free STD benefits when they need income replacement most urgently.

Structuring DI for Different Workforce Segments

Not all employees need the same disability coverage. High-income employees face two challenges: group LTD monthly maximums may cap their actual replacement rate below 50%, and their lifestyle expenses often require higher replacement ratios.

For employees earning above $150,000, consider supplemental individual disability policies that provide additional coverage above the group LTD maximum. For a comprehensive comparison of the tradeoffs between group and individual coverage, see our analysis of group vs. individual disability insurance. These policies can include own-occupation definitions (rather than any-occupation), cost-of-living adjustments, and future increase options and other valuable riders that group plans typically do not offer. For a step-by-step approach to evaluating these options, see our buyer's guide to comparing DI quotes.

For hourly or lower-wage employees, STD is often the higher priority since these workers have the least financial reserves to bridge even a short gap in income. A robust STD plan with a short elimination period can prevent the financial crisis that leads employees to return to work before they have fully recovered.

What to Look For in a Disability Insurance Carrier

When evaluating carriers, focus on claims philosophy (denial rates vary significantly between carriers), financial strength ratings (A.M. Best A- or higher), the definition of disability used in the contract (own-occupation vs. any-occupation vs. hybrid definitions), and rehabilitation and return-to-work program quality. A carrier that helps employees recover and return to work reduces long-term claims costs and improves employee outcomes.

Work with your disability insurance broker to design a disability insurance program tailored to your workforce. Ensuring compliance with ERISA regulations is critical when sponsoring disability plans. For guidance on regulatory requirements, see our resource on ERISA compliance for employer-sponsored disability plans. For definitions of all the key terms referenced in this article, consult our comprehensive DI and LTC insurance glossary.