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Retirement Funding Insurance

Look at that!  A title with no actual words in it.  Best day ever!

I was teaching at an ETAP for transitioning senior military officers and senior NCOs the other day and a question came up about the Survivor Benefits plan (SBP) and Dependency and Indemnity Compensation (DIC).  The question was about how they interacted, whether "skipping" SPB made sense, and if qualifying for DIC "cheats" the surviving spouse.

Explaining These Related Military and Veterans Benefits

SBP is a benefit you "pay for".  If you elect SBP when you retire, you will get a reduced military pension during your lifetime and your surviving spouse will receive a portion of your benefit when you pass away.  (Check back in the future for more information on how SBP works.) When your spouse receives SBP benefits, those benefits are taxable.

On the other hand, DIC is a Veterans Administration (VA) Benefit and your spouse must apply to receive it.  DIC is paid if the member dies of a service connected cause.  Service connected includes death while on active duty as well as after retirement if the cause of death is due to an injury or disease contracted while the service member was on active duty.  DIC may also be paid under the following circumstances

  • The service member had a 100% VA disability rating for 10 or more continuous years immediately preceding death
  • The service member had a 100% disability rating for at least 5 continuous years and the 100% disability rating was awarded immediately at retirement
  • The member had a 100% VA disability rating for at least one year immediately preceding death, the member was a former prisoner of war and the death occurred after September 30, 1999.

It is important to note two other things about DIC.  First of all, DIC payments are tax free while, as mentioned above, SBP payments are taxable.  Secondly, for every dollar in DIC your spouse receives his or her SBP payments are reduced by one dollar (your spouse may receive Special Survivor Indemnity Allowance to correct the offset if Congress continues to fund it but it won't be 100% of the offset).

So Let's Go Back to the Colonel's Questions

Hopefully the above information explained how the two programs interacted, so what about the other two questions?

  1. The amount of DIC paid is not based on rank and is an amount set by Congress.  In the case of a retired senior military officer, DIC will be substantially less than the full SBP benefit.  Additionally, unless the retired senior military leader is rated 100% disabled, there is no guarantee the surviving spouse will qualify for DIC (even with a 100% rating in most cases you have to live at least 5 years past retirement).  So...DIC is not a substitute for SBP and you shouldn't just "skip it" and count on DIC.
  2. As mentioned, if your spouse qualifies for DIC his or her SBP will be reduced dollar for dollar.  This actually helps your spouse as his or her taxable income will go down so she will pay less taxes on his or her SBP but will get a larger "take home" amount from DIC than from the offset after-tax SBP benefits.  You may be thinking to yourself, "Wait, I paid for SBP benefits and if my spouse gets DIC benefits I paid for benefits I'm not receiving!".  Rest easy.  If your spouse does qualify for DIC, DFAS will refund the amount of premiums that were paid towards the offset SBP.  The refund will be taxable though.

Military and VA Benefits Understanding is Essential for a Complete Financial Plan

If your advisor can't even spell SBP or DIC, you have to wonder if his or her advice is suited for you. There are a few advisors out there, and we're one of them, that specialize in working with current and prior military members.  You might want to call on one if you're looking for financial advice.

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