We provide a lifecycle framework for comparing the insurance value of disability
benefits and the incentive cost. We estimate the risks that individuals face and the
parameters governing the disability insurance program using longitudinal US data on
consumption, health, disability insurance, and wages. We characterize the economic
effects of disability insurance and study how policy reforms impact behavior and house-
hold welfare. Because of high rejections rates of disabled applicants, welfare increases
as the program becomes less strict, despite the worsening of incentives. False appli-
cations decline when reducing generosity and increasing reassessments; these policies
increase welfare, despite the decline in insurance.