facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search brokercheck brokercheck
%POST_TITLE% Thumbnail

SBP & DIC

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.




Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.