Disability: Economic Costs and Insurance Protection

Because chronic or sudden-onset health conditions are known to limit or prevent paid work, public and private disability programs are in place to provide income for persons who cannot work. Such programs typically provide benefits for disabled persons of all ages, but have an eligibility cap at an age when individuals are expected to rely on retirement-related savings and transfer programs.

Disability insurance that compensates for the loss in earnings due to a work-limiting disability may be obtained through the employer or through the private purchase of insurance, and is provided by the Social Security Administration to workers in covered employment. The eligibility of a person for disability payments depends on how the policy defines a compensable disability, whether there is a waiting period (or elimination period), and the benefit period.

A policy or program typically defines a compensable disability as total or partial and by the type of occupation whose performance the disability prevents. Benefits may be paid only after a waiting (or elimination) period, and the duration of payments may be limited. Work-related disability programs pay benefits based on prior wages, although the calculation of replacement varies across programs.

Disability is typically defined as the inability to perform occupational duties; that occupation may be specified as the insured's own occupation at the time of disablement, any occupation for which the insured is trained, or any gainful occupation. This distinction is critical to whether a person unable to perform his or her usual occupation is expected to seek other employment. The distinction between total and partial disability is important to the payment amount when a person is deemed eligible for disability payments. Total disability will qualify an individual for full payments, whereas partial disability, or the inability to perform one or more important tasks of a person's occupation, leads to a partial payment of disability benefits.

Policies typically have waiting periods during which benefits are not paid. A longer period reduces the costs of policies to the individual, employer, and (in the case of Social Security) society. It is also expected that employed individuals will have access to sick leave or other short-term disability benefits, or their own savings. In addition, policies limit the duration of benefits to either a specific number of years or to an age at which retirement benefits are expected to be accessed. Finally, disability programs, even those that require documentation that the disability is total and expected to be permanent, may require some type of rehabilitation or retraining.

The cost of disability policies to individuals and employers has risen substantially in recent years due to an increase in the number of claims, in part the result of the recognition that mental health and alcohol and drug problems are legitimate causes of work disability. This has changed the distribution of reported disabilities among disability income recipients and has led to changes in policy provisions that are likely to make disability policies more restrictive and more difficult for individuals to obtain.