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Disability Insurance > Articles > Need For Disability Insurance > Four Drawbacks Regarding Disability Retirement Benefits for Federal Employees

Four Drawbacks Regarding Disability Retirement Benefits for Federal Employees

Federal employees typically have disability coverage through the Federal Employee Retirement System (FERS). However there are four major concerns regarding disability benefits under FERS.


  1. For the first 12 months of a disability, the benefits payable is only 60% of your high-3 average salary. Thereafter, only 40% of your high-3 average salary is payable.*
  2. Disability benefits are subject to reduction if any Social Security benefit are payable. During the initial 12 months, 100% of Social Security benefits payable are reduced. Thereafter, 60% of Social Security benefits payable are reduced.
  3. Disability benefits are subject to tax as regular income.** This is typical with employer paid coverage.
  4. Disability coverage is not portable to other employers. You will lose your FERS disability retirement coverage if you leave the federal government. If you leave the federal government you may have to apply for individual disability coverage at such time. To be approved for individual disability insurance, you have to pass a medical evaluation at the time of application. If your health is not good, you may be declined. Sometimes, you can still be approved but the cost for insurance will have to be increased to counter the higher risk of your not so good health situation.


In addition to your future health status, the cost for individual disability insurance is directly tied to your age and a few other factors such as your occupation and duties. Not having any portability features can present insurability issues later if and when you choose to work outside of the federal government. 


Sixty or forty percent of your income replaced during a disability may put you in a tough financial situation. When you are not disabled, you may already find it tough enough as it is living off 100% of your income. After paying regular income tax on your FERS disability retirement benefit, there may barely be enough for you to survive on and probably not much of anything left over for retirement savings, recreational activities and vacations. You may survive for a while, but probably not thrive. 


If the FERS disability retirement plan is the only plan that you have for disability income protection, upon a long-term disability, you will likely find yourself scrapping by to make ends meet and the future would probably not be much different. 


There is a viable solution to the aforementioned exposures if you are still healthy. Federal employees, with the exception of postal workers, railroad employees and military personnel can apply for individual disability insurance to help close the disability income protection gap left exposed by FERS. There are a few major benefits in purchasing an individual disability insurance policy to supplement your FERS disability coverage.


  • Benefits from individual disability policies are not taxable since you pay for it yourself with your already taxed income.** This will really help close the income replacement gap.
  • Benefits from individual disability policies are not subject to reduction if Social Security benefits are also payable. Furthermore, benefits are not subject to reduction if workers compensation, unemployment or other government benefits are also payable while you are on claim. If you purchase a true own-occupation disability policy, disability benefits continues even if you choose to earn an income working in another occupation while disabled from your regular occupation.
  • Individual disability policies are fully portable to other employers or businesses that you may choose to move on to. You will lose your FERS disability coverage upon leaving the federal government but not your individual coverage.


Many federal employees do not know that they have disability benefits within the FERS benefits package. Some federal employees know that they have some kind of disability benefits but are not aware of the multiple limiting provisions. 


If you are like the overwhelming majority of us, the accumulation of your wealth is directly tied to the income that you are able to earn. The ability to do your work and earn an income does go away at some point. The aging process, accumulated accidents and illnesses will catch up to us all. Federal employees are no different. For some, the ability to earn an income is lost before attaining sufficient wealth to meet life goals such as but not limiting to raising children, fund retirement, pay off mortgages etc... 


The general idea is to optimally insure yourself for disability during your income dependent years before any health concerns arises. The consequences of not having sufficient disability insurance is unknown, unpredictable and unmeasurable. You will be in a much lower risk position if you are sufficiently insured for disability. The cost for disability insurance, for healthy applicants is small, known, measurable, and predictable. 


The cost for disability insurance can be guaranteed until your retirement years as long as you purchase an individual policy that has both the Non-cancellable and Guaranteed Renewable provisions. The two policy provisions prevents the insuring company from making changes to your policy or raise your price as long as you pay on time. 


To start the process to close the income protection gap left exposed by FERS, request a disability insurance quote. Let your agent know that you are a federal employee. Submit an application. You will go through a medical evaluation before an approval can be made. Once you pay for the policy, the insurance company cannot make changes to your policy or raise your cost, even if your health takes a turn for the worse.

*Disability benefits at age 62 or older is paid based on an annuity computation that is tied to your years and months of service. See  https://www.opm.gov/forms/pdfimage/sf3112-2.pdf for further detail.

**See your tax advisor for additional information.

Jack Le, CFP®, CLU® holds a Financial Representative contract with The Guardian Life Insurance Company of America. The views and opinions expressed herein are solely the author and do not necessarily represent the views or opinions of The Guardian Life Insurance Company of America or its subsidiaries or affiliates thereof. 

2018-55927 Exp 03/20.


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