The risk of suffering a disability that results in a loss of income is one of the most serious financial
possibilities that any worker faces. The risk of disability is actually much higher than that of an unexpected
death before age 65.
Younger workers are most vulnerable because they have the most to lose — many years of income,
including contributions to retirement plans and savings. A 30-year-old, for example, faces a 54 percent
chance of long-term disability — that is a disability that will last longer than 90 days — before age 65. With
that level of risk, it is important to understand the options and plan carefully.
For work-related disabilities, federal workers are well-protected by the Federal Employees Compensation
Act, which will replace about two-thirds of their lost income and protect their retirement annuities.
Employees covered by the Federal Employees Retirement System should keep in mind, however, that
they will need to continue to fund any voluntary retirement savings from their disability benefits. These,
and all employer-provided disability benefits, are typically taxable.
Disability not related to work, if short term, can be covered by sick leave; and, if long term, by disability
retirement benefits for Civil Service Retirement System participants and by a combination of disability
retirement and Social Security disability benefits for those covered by FERS.
As a rule of thumb, FERS-covered employees should expect to receive about 60 percent of their highthree — the average of their three consecutive years of highest salaries — in the first year of qualifying for
long-term disability not related to work, and about 40 percent in subsequent years until they reach Social
Security’s minimum retirement age. CSRS participants should expect to receive the higher of their earned
retirement annuity or 40 percent of their high-three pay from the start. Again, these benefits are taxable.
Younger workers, for whom the risk of disability and potential loss of income are the greatest, may wish to
consider supplemental private disability insurance. This insurance is designed to provide additional
income in an amount that will bring total gross disability income to about 60 percent of the worker’s pay
The availability of this insurance varies according to the age and health of the applicant and the
occupation of the applicant, and it has been notoriously difficult to find. In recent years, more private
insurers have begun to offer these policies, but the options are still quite limited. Guardian Life,
Massachusetts Mutual and Wright & Co., for example, currently offer supplemental disability insurance for
When selecting a plan, be careful to weigh the cost-benefit balance before committing. It is not unusual
for the premiums to be relatively high for a small marginal benefit.
For example, a 45-year-old earning $50,000 per year with 10 years to retirement, expects to receive
about 40 percent, or $20,000 per year in the event of disability. She considers a supplemental policy that
will pay up to $10,000 per year in additional benefits. By looking at the table, she determines that the
probability that she will be disabled before age 65 is about 40 percent. But she is only concerned with the
10-year period between now and age 55 when she can retire. She decides to estimate her risk as 25
percent, the risk factor from the table for the period from age 55 to age 65. This is not the same 10-year
period she is facing now, but she decides it is a reasonable substitute for estimating her insurance need.
Multiplying the probability of an event occurring by the resulting benefit if it occurs produces a statistical
result called value. So, the 45-year-old calculates that the value of the additional disability coverage is
about 25 percent times $100,000, representing the $10,000 per year in additional benefits she would
received if she were disabled for the 10 years she has remaining until retirement. She should then weigh
this value, $25,000, against the premium she would pay before deciding to buy a policy.
Initially, she may decide that the extra insurance is a good buy, but she should re-evaluate her decision
each year. As the probability of disability falls and the time to retirement shortens, the expected value will
fall rapidly, while the cost of the insurance remains the same. If she weren’t paying the insurance
premium, she could invest the money in a self-insurance fund. At some point, she might decide to drop
the supplemental insurance.
While this example ignores inflation in pay, taxes and certain other factors, it demonstrates a useful and
sufficiently rigorous approach to evaluate your options and decide whether to buy supplemental disability
Written by Mike Miles
For the Federal Times
Publication February 28, 2005