financial planner Stephen Zelcer
Disability Income for Federal Employees

Disability Income for Federal Employees

If you’ve been a federal employee for at least 18 months, you are covered by FERS Disability. 

The FERS disability benefit starts off at 60% of you salary (or hi-3, whichever is higher) only for the first year.  Subsequent years, the disability benefit drops to 40% of your salary.  

Two important points about this disability benefit:

#1 – Taxable:

FERS disability income is taxable income (unlike private disability insurance income).  If living on 60% of your salary sounds challenging, it becomes even harder after taxes are removed.  Now you’re possibly down to 50%.

#2 – Below industry standard: 

Most private disability policies offer a max benefit of 60%, non-taxable.  That’s the industry standard. 

FERS, on the other hand, starts off at 60% – which, remember, is taxable – and then drops to 40% – which, again, is taxable.  This means FERS disability is below industry standard. 

Ways to raise your coverage to above industry standard:

There are two ways you can add to your overall disability coverage –

  1. Buy a supplemental disability policy
  2. Create an alternate source of income

#1 – Buy a supplemental disability policy:

You may want to explore a private, supplemental disability policy.  However, interestingly, many insurance carriers will not insure federal employees!  Since federal employees already have their FERS coverage, most carriers don’t want to provide “double coverage” as that will just provide incentive to get “disabled.” However, a handful of insurance companies do offer disability coverage for federal employees. 

If you pursue a private disability policy, here are things you should consider:

  • You don’t need to buy a full policy:  Since you already have FERS disability coverage, you will not need to purchase a “full” private disability policy.  Getting a policy that provides 20% of your salary will be enough to reach the industry standard of 60%.  (of course, if you want more than 60%, that’s up to you.)
  • Longer deductible period: If you can suffice with the 60% FERS disability benefit for the first year, then you might not need your private disability policy to kick in right away.  You can wait until the 60% drops to 40% in the 2nd year.  This means you can elect a 1-year “deductible” period on your private policy.  Having a longer deductible will reduce the cost of the policy.
  • Add a retirement supplement rider:  This benefit is in addition to your basic disability policy.  This rider covers your contributions to your retirement accounts such as your TSP or IRA. 

For example:  If someone contributing $10,000 a year into his TSP, this retirement supplement rider will contribute $10,000 a year into a retirement fund. This benefit is also non-taxable, not in the year it was put into this retirement fund, nor when removed from the fund (however, any growth on this money is taxable).

  • Return of premium rider.  If you don’t get disabled, you get your money back.  This rider will increase the cost of the insurance but it’s usually money well spent.  Statistically most people will not use their disability policy.  This means that any premium you pay will likely go in the trash (as with any insurance).  With the return of premium rider, you get a refund of your premiums. 

So, for example, let’s say the disability policy costs $2,000, and adding the return of premium rider will cost an additional $1,000, bringing the total cost to $3,000.  That’s an additional $1,000.

Not all return of premium riders are the same but I’ve seen some that give a guaranteed rate of return of over 13%, non-taxable! 

#2 – Create an alternate source of income:

Disability insurance is not the only way to protect yourself in case of disability.  If you have another source of income, other than your 9-5 job, that, too hedges against disability. 

Here are a few common ways to add additional sources of income:

  • Interest or Dividend paying vehicles: You may already own stocks or bonds that pay dividends or interest.  But many simply re-invest that money.  Granted re-investing is generally a wise thing to do, however, it may be worthwhile to receive your dividends and interest during times when your main source of income is suffering.  You can easily elect to have your dividends or interest checks mailed or direct deposited to you.
  • Rental Property: Owning a rental property doesn’t always involve expensive properties with large down-payments.  You can buy a property with 20%-35% down payment, and you can write off the mortgage interest and depreciation and a bunch of other expenses to reduce the taxation of your rental income.  Nor does managing a property have to be a time consuming job.  You can always higher a property manager, or if the property is small enough, you can manage it yourself.  Also, consider investing with a partner and –get this- “diversifying” the management and the financial investment!
  • Secondary Business: Self-employment income is also tremendously rewarding.  Having a business that you build in off-hours can really blossom over the years.  Starting small, developing a product or service and a client base is very realistic over time.  Whether you’re good at web development or writing blogs or books, business consultation or some form of therapy, etc.  Everyone has a special skill and interest which they can monetize. 

Hopefully, we’ll never confront a disability situation.  But, taking the above steps now can help set the table in case misfortune strikes. 

My prayer for blessing and success to us all.

If you require legal advice on Federal Employment Law then consider contacting Pines Federal Employment Attorneys.

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