The way the rules are currently written, survivors of deceased military member and veterans who would be eligible for both Survivor Benefit Plan (SBP) and Dependency and Indemnity Compensation (DIC) benefits may not receive the full amount of both benefits. This is because of a rule called the SBP-DIC offset, under which SBP benefits are reduced by the amount of DIC benefits received. As a result, under the basic rule, the total SBP-DIC benefit received by survivors is no more than the larger of the SBP benefit or the DIC benefit.
While it is a simple rule on the surface, there are details that make the equation a little more complicated.
Tax Issues
First, DIC benefits are non-taxable, while SBP benefits are taxable. As a result, survivors who have their SBP payments offset by DIC payments do find that their net (take-home) benefits increase. The amount differs depending on the rest of the recipient's tax picture, but it is typically a few hundred dollars a month increase.
Refund of Premiums
Unless the death of the service member occurred on active duty, the military retiree paid into the SBP program. If, after the service member's death, it is determined that the survivor is eligible of DIC, the survivor will receive a pro-rated refund of the premiums that were paid into the SBP.
The Dumb Remarriage Rule
There is a weird twist to the remarriage rules for DIC. Generally speaking, you lose DIC benefits when you remarry. However, due to a weirdly worded law and subsequent court case, survivors who remarry after age 57 are eligible to retain their DIC benefits AND there is no offset applied.
A Temporary "Fix"
Through 2017, there is a temporary allowance called the Special Survivor Indemnity Allowance that provides additional cash benefits to survivors currently being impacted by the SBP-DIC offset.
While these rules are not popular, they have been the rules for a very long time. Many veterans groups spend a lot of time and money every year lobbying for these rules to be changed. Every year it seems possible, but it hasn't happened yet. In the meantime, you should be sure you understand the SBP-DIC offset rules so you can make informed decisions with your overall financial planning.
