How Government Disables Private Disability Insurance

By Wright, Robert E. | Ideas on Liberty, February 2003 | Go to article overview

How Government Disables Private Disability Insurance


Wright, Robert E., Ideas on Liberty


Taxed Social Security earnings determine the level of three major types of Social Security benefits-the life annuity at the center of most discussions of Social Security, survivors' benefits, and disability benefits-available to individual working Americans at any given time. All three benefits were originally the bailiwick of privately owned and managed business firms. Those firms, called life insurance companies, remain the most efficient and just method for protecting individuals from the economic travails of dying too young (life insurance), dying too old (life annuity), or losing the ability to work (disability). The economics of disability will be discussed here.

In the late 1910s, life insurers in the United States began to offer insurance against the risk of "total" and "permanent" inability to work by offering, in return for a rationally calculated premium, periodic cash payments to life-insurance policyholders if and when they became disabled. Rather unwisely, the companies linked the amount of the payment to the face value of the policy rather than to the policyholder's current income. Predictably, during the Great Depression disability claims skyrocketed. Though not as liable to abuse as unemployment insurance, disability insurance claims are subject to fraud, misrepresentation, and ambiguity. Insurance companies suffered losses, but at the same time they learned that disability insurance will be abused unless the monthly payment is less than the policyholder's net remuneration from work. As the payment approaches or exceeds take-home pay, the policyholder will find it increasingly tempting to claim disability.

Life insurers also learned that individuals are not equally likely to suffer from a disabling illness or accident. As they learn more about the variables that increase the likelihood of disability, they develop premium rate books which ensure that each policyholder pays an actuarially sound premium based on the probability that he will become disabled. Moreover, simple business competition ensures that disability premiums tend toward their rational or natural level. If an insurer charges premiums that are too high, it makes large profits and attracts new entrants that in turn create downward pressure on premiums. If an insurer charges premiums that are too low, it suffers losses until it raises premiums or exits. Regulations and artificial barriers to entry limit the efficiency of the market to some extent, but all in all, market forces prevail and disability premiums are as rational and fair as the government allows.

In addition, life insurers have incentives to pay legitimate claims in a timely manner, to deny spurious claims, and to monitor disability beneficiaries closely. Any insurer that fails to pay legitimate claims, or that delays payment, will see its reputation suffer. Likewise, any insurer that pays fraudulent claims incites further instances of moral hazard and soon becomes unprofitable. Similarly, the profitability of insurers that do not regularly check to ensure that beneficiaries remain disabled also suffers. Insurers therefore give their claims representatives incentives to treat policyholders fairly, which means catching fakers but not begrudging the truly disabled their contractual due.

Equitable Market

Indeed, the private system of disability is, like all free markets, equitable. Individuals can choose to go uninsured if they desire; healthy individuals who desire coverage may obtain it at a rational and competitive market price. Claimants are treated fairly; if a disagreement arises, both parties have access to objective courts of law, arbitration proceedings, or private negotiation. In borderline cases, for example, parties are free to settle the claim with a lump sum payment or a reduced level of periodic payments.

Private disability insurance became an even better bargain in the 1950s because of the rapid proliferation of "group insurance," a fringe benefit many employers offered to employees.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

How Government Disables Private Disability Insurance
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.