Should I buy short-term disability insurance or just use my emergency fund?

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Here’s this month’s New Jersey personal finance question: Do I need to buy short-term disability insurance or is my emergency fund good enough?

A short-term disability is characterized by the inability to work for a period of less than a year. It is not the same as worker’s compensation, which only covers injuries suffered from your job.

Most people maintain an emergency fund to cover times when they are out of work for the short term. An emergency fund consists of cash or cash-equivalent savings to cover three to six months of non-discretionary expenses, the costs of living that you have to pay to live (housing, food, medical expenses, etc.) You need at least three months of emergency funds, but six months is ideal.

Should you buy short-term disability insurance or not?

A short-term disability insurance policy is a contract you elect to enter into with an insurance company. In exchange for monthly premiums, insurance companies will typically replace a portion of lost income for up to 12 months.

Why you may need it:

  • If you don’t have the cash saved up, and are likely not going to be able to accumulate enough of an emergency fund to cover your expenses, it may make sense to look at it. For example, if you have a large number of dependents, it may not be possible to stash away the amount of cash needed to “self-insure”, or fund your living expenses from your own savings.
  • If you have a job that required a great deal of training and education, and you are unable to return to the same job for a while after your injury, it may make sense to get short-term disability insurance. In such a case, you can opt for an own-occupation policy, one that will compensate you in the event you are unable to return to your specific line of work.
  • Your benefits would be tax-free, if you buy an individual policy (as opposed to getting it through your work and paying with pre-tax dollars). This is especially useful for those in a high tax bracket.

Why you may not need it:

  • Disability insurance requires a medical exam and during the process of underwriting, your medical history is taken into account. If there are certain risk factors or pre-existing conditions, your premiums may be higher. Self-insuring may make more sense.
  • Certain pre-existing conditions may not be covered, depending upon the insurance company.
  • You may be able to get coverage through your job. Some states, such as New Jersey, require employers to provide coverage to eligible employees. However, this is not permanent; if you lose your job, your coverage terminates as well.

Before you buy….

Be sure to review the policy for any specifically stated exceptions, such as pre-existing conditions or self-inflicted injuries. They may also reduce the benefits paid if workers’ compensation or Social Security disability benefits are being received.

Bottom line: Is it worth it, or not?

Short-term disability insurance may be attractive depending on your current income, the state you reside in, and the amount saved in your emergency fund. Please contact me directly for any advice specific to your circumstances.



Danish, Jennifer. (2020, November 3rd). Bryant Legal Group. What are the pros and cons of short-term disability?

State of New Jersey Department of Labor and Workforce Development. Division of Temporary Disability and Family Leave Insurance. When You’re Sick, Injured, or Post-Surgery.

The Law Offices of Lloyd E. Bennett. Worker’s Comp FAQ. Frequently Asked Questions: Workers’ Compensation.       

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