Disability Insurance

ONE OF THE CAUSES OF poverty is the loss of income because of illness or injury. To prevent this, disability insurance coverage by either the government or private companies has been developed. The idea of individual disability insurance is a simple concept. Insurance companies have designed insurance policies so that for a relatively small monthly payment a wage earner can purchase a policy that replaces much of his gross income. The amount replaced varies with the policy and also varies accordingly in cost.

In the United States “income from whatever source derived” (Sixteenth Amendment to the Constitution) is liable for income tax. The federal government in the United States has adopted legislation that excludes benefits from a disability policy as part of the gross income of an individual that would be liable for taxation. The exclusion of disability insurance benefit payments from income taxes has two desirable advantages. First, it reduces the cost of the insurance to individuals. Otherwise, in order to replace the income that would be lost if injury or illness caused permanent loss of the ability to earn a living by working, the cost of the needed insurance would be much higher.

An additional advantage is that a greater number of people who participate in purchasing disability insurance policies increases the pool of people who are contributing to the unfortunate few who will experience permanent disability. It also provides the insurance company with funds for investment, which not only attracts stockholder investors but also further reduces the cost of developing the reserves needed to pay disability benefits when necessary.

In the United States, the large number of insurance companies offering disability insurance policies gives consumers many competitive choices. However, as in all market situations, the quality of products varies along with the price. One danger to a person who purchases a [Page 263]disability policy is that the insurance company may have drafted the policy so that it will seek to evade payment responsibility under the terms of the policy. Another danger is that the company may not succeed financially and therefore go bankrupt. If bankruptcy occurs, then the insured whom is owed financial support under the terms of the disability policy may lose the income and receive nothing. The financial impact for a family in that circumstance could be devastating.

Insurance companies are regulated in all the American states by a state insurance commission or commissioner. The exact title varies from state to state, but the functions are performed regardless of the title. The mandates for each insurance commissioner in every state are to see that the insurance companies operate on the basis of sound principles and to promulgate regulations that encourage insurance companies to operate in the state.

Other forms of disability insurance are those provided by governments. The Social Security system in the United States provides a limited amount of supplemental income for those who suffer permanent disability before their retirement. It pays for permanent complete disability as a percentage of the income the person was making. However, unlike some private policies, it will not pay for partial disability. In addition, if the person who is disabled has a private policy, a windfall elimination formula reduces the amount paid. European countries have similar systems, but in those countries the benefits are much more generous.

...