WHAT HAPPENS IF I LOSE MY MEDICAL AT SOUTHWEST AIRLINES

[00:01:21]Well folks, welcome to another episode of Pilot’s Portfolio. My name is Timothy P. Pope. I’m a certified financial planner specializing in the planning needs of the professional pilot. I am so glad you’re here. We are gonna continue our series talking about loss of license, loss of medical insurance at the major airlines. But, before we do, let’s just acknowledge, man, it is been quite a year in the market so, we’re recording this early July. So, from February to April this year the market participants were really trying to find footing, trying to find some clarity in the midst of a trade war. They were taking defensive positions.
[00:02:02]So, between February and April the market dropped about 20% and now we’re here in early July. The s and p index, the Nasdaq are both up between 6.5 and 7%. And so the intra-year volatility can be extreme. And I will acknowledge that, you know, if you, if you had a diversified portfolio, you had, you know, particularly some international equities earlier this year, you likely did not experience the full 20% drop, even if you were in a hundred percent stock position and then if you had some bonds in there and some international plus, you know, the large cap us, you again likely did not experience that 20% drop in your portfolio, but the intrayear volatility can be extreme. But as you, as we sit here now, it looks like, you know, if you were just to tune in and, and say, oh, you know, I’m curious, what, what has the, the market done so far in 2025?And, you just see that six point a half to 7% rate of return, you’d say, oh, right? It really wouldn’t tell the story of what, what we’ve all experienced earlier this year. But because you’ve listened to the show and you confirm that your financial plan was in line with your targets, you’ve automated your savings and your 401k and you save consistently outside of the 401k, whether it’s in brokerage accounts or backdoor Ross, or what have you.
[00:03:29]You know, you continued to buy and, you’ve been rewarded by that. So you, you know, that’s what we like to see is a steady hand at the controls. So let’s talk about, today we’re talking about Southwest Airlines and what happens if you lose your medical, you know, loss of license insurance is such a valuable coverage that the airlines provide. In fact, uh, we put a recent poll out on LinkedIn. The sample size wasn’t really large, but what I saw was this was the question, and this is how folks responded. So the question was something along the lines of, if you lose your medical, would your loss of medical benefit be able to cover your monthly expenses? And, 67% of the respondents said yes, and I loved seeing that. And here’s why. Because on the one hand, that means they actually know what their monthly expenses are and, then on the other hand, it
means that they’re familiar with their loss of medical benefit. And so they know that if they’re unable to fly, that those monthly expenses would be covered because of what that insurance provides for them.
[00:04:36]And I could only imagine that’s just gives you a really good peace of mind to say, huh you know what, if something happens, you know, I will be okay. And that’s awesome. You know, if you’re in the business aviation community and particularly part 91, I would encourage you to inquire about your loss of medical coverage with your company. You know, I’ve spoken to clients, that are part 91 and the company has taken amazing care of them when they’ve gone through major health concerns, but don’t assume that that’s going to be your case. So go and ask about that policy if you’re not sure, what benefits your company has in store for you.
[00:05:19]So, let’s jump back to Southwest here. I’ve got to admit, guys, that Southwest’s loss of license program is probably my favorite. And, I’ll tell you why as we get through, to some of my favorite provisions here. But if you are just joining the show or you’ve missed the last few episodes, we’ve already covered American airlines.Delta Airlines, benefits so, if you’re an American or a Delta Pilot, go listen to those. And if you are not at your major airline yet. Listen to all of them because there’s nuances between them. And, I would imagine, I hope that you’re not gonna base your hiring decision or you’re accepting your offer, based off loss of medical.But, it is nice to know what you could expect. So if you’re not yet, uh, at your major airline, listen to all of these. There are nuances here, so. All right, let’s talk about this. The Southwest plan, it defines disability as the inability to hold your first class medical. Okay. And so there you go.
[00:06:15]That is your most advantageous definition, and it’s essentially in line with the other carriers as well. I think the big thing that we want to know is, well, how does Southwest, how are they gonna calculate what my. Disability payment is going to be if I have to stop flying and, the way that Southwest does it is if you’ve been on property for two years or more, then they’re just gonna say, Hey, what was the average salary that you’ve earned during the 12 months proceeding your date of loss of whenever you lost your medical. So it was pretty simple. Some of the other carriers have other calculations that they do longer look back periods. Southwest says, hey, what’d you do in the last 12 if you’ve been on property for more than two years? And then they take that amount, they take that average earnings over the last 12 months, and they are going to give you 50% of that.
[00:07:13]Now, Southwest does not have a cap of what that 50% could be. So that is nice. There are some airlines, and we’ll talk about them, that do have a cap on your loss of medical benefit. And so, hey, you look at the last 12, you take your average, you take 50% of that number, and that’s what is going to you take that number and you divide that by 12, and that’s what you’re going to receive for your loss of medical now. Most insurances do have what’s called an elimination period. And the Southwest elimination period is 60 days. And simply the elimination period is how long after I lose my medical can I begin to receive benefits.
[00:07:47]So, 60 days is quite standard, a two month waiting period there. And then the other question that we typically like to ask is, well, how long will my benefits last? And Southwest, like the other carriers, will take you out to, mandatory FAA retirement age. So right now that’s 65 so, if you go on disability and it lasts until age 65, then you’re gonna be covered until age 65. Most disability claims are not all, you know, don’t last for years, upon years upon years. According to the data, we can see it lasting at age 65. If you’re later in your career and you have a claim and then boom, it takes you out but, if you’re in your forties, early fifties, or even thirties, it’s nice to know that it could take you out to age 65 if needed
[00:08:40]One area where Southwest shines that the other carriers do not have, and this is one of the reasons that this Southwest program, on loss of licenses, is my favorite, is that there is a Cola.That stands for Cost of Living Adjustments. So for a pilot who goes on disability and you’re on disability for five years or more. Every five years, the company is going to assess your disability payment and they’re going to give you a 5% increase in your monthly income. Okay? Now, before you say, well, you know, Tim, that doesn’t keep up with inflation. You are right. It doesn’t, but no other airline has that provision and so it’s better than zero. So that cola, so that’s a nice benefit there. Now we’ve talked about what your disability payment would be if you’ve been on property for longer than two years. What if you’ve been on property for less than two years? So, if you’ve been at Southwest for less than two years, the way they’re gonna calculate this is they’re gonna say, hey, well, your monthly base earnings is simply gonna be your TFP rate.
[00:09:50]So whether you’re year one or year two at that point, and then they’re going to multiply that by 110 TFP. Okay? And that’s gonna represent your monthly based earnings. And then they’re gonna take 50% of that number. And that’s what you’re gonna get on a monthly basis for the duration of your, of your disability. Okay? Now, they’ve also got a program to help out guys who haven’t been there for very long. So if you’ve been there for less than 20 months, and it’s
kind of like this short term disability, if you will. So, other carriers have a long term disability program and then a short term disability program and Southwest has what’s called a new hire bridge disability benefit. And so it acts like short term disability. The way it works is if you have been on property for less than 20 months and you have a disability event, the company’s gonna give you 10 TFP per bridge month. And so let’s break that down.
[00:10:39]This is a one-time payment. Yes it is eligible for you to collect your NEC on it, so your non-elective contribution into your 401k. And yes, it is eligible for you to receive your 1% and soon to be 2% of your market-based cash balance contribution. So just side note, Southwest, unlike the other carriers, your market-based cash balance are automatic contributions1% moving to 2% soon whereas the other carriers, you have to get spill cash in order for that money to go into your market-based cash balance plan. So, the new hire bridge disability benefit, you’re gonna get 10 TFP per bridge month. And the way they calculate this is, new hire bridge disability benefit is they take 20 months, and they subtract the number of months that you’ve been on property and you’ve been providing service to the airlines, and then they take that amount, that difference there. So let’s say you’ve been on for five months. So 20 minus 5 is going to be 15, and then you’re going to get 10 TFP, for each of those 15 months. So that’s 150 TFP. You know, that’s a one time payment and it’s designed to help you get through the elimination period.
[00:11:50]Now, last year I worked with at least two pilots that lost their medical in under a year whenever they were at their company. And, you know, they both, have well regained it and the other one’s working on it.But , I bring that up to say, hey, things happen. And so it’s nice to have this new hire bridge disability benefit.
[00:13:14]So we’ve talked about how Southwest is going to calculate your benefit, and how long it lasts.Let’s talk about some options that you guys have. Okay? So, you do have the option to select a taxable or non-taxable election to receive your disability payment. And, here’s the difference if you select a taxable disability payment. That means that if you go on claim, you’re gonna receive your monthly benefit, and then at the end of the year, you’re going to need to pay taxes on the disability income that you’ve received. Okay? So, that’s if you choose a taxable benefit. If you choose a non-taxable benefit or an after-tax benefit, then if you go on claim, you will receive your monthly benefit. And, then at the end of the year, there’s no taxes to pay on what you’ve received. The difference is where it shows up is with your non-taxable benefit, you’re gonna pay taxes on imputed income throughout the year.
[00:14:11]So, whether you’re on claim or not, or when you’re not on claim, you’re active, you’re receiving a paycheck from Southwest, you’re gonna pay that imputed income. If you choose the taxable benefit, you will not pay taxes on the imputed income. If you go on claim, that’s when you’ll pay the taxes. So there really is no free lunch, if you will. But I think just practically speaking, it’s important to understand when this might be something you want to think about. So, I will say broadly, when I’m working with pilots, we usually consider electing the non-taxable election because administratively, if you go on disability, having to figure out and pay taxes on your disability income is probably one of the furthest things of your mind. Like you’re probably focused on, hey, what is it gonna take to get back in the flight deck? Right? So that’s one thing. But two, you know, if you choose the non-taxable benefit, I’ve seen some swap of documents that say, Hey, look, if you choose the non-taxable benefit, then it’s gonna be more like you receiving 75%, or it could be, and there’s some assumptions here on tax rates and so on, but it could be more like receiving 75% of your take home pay versus, you know, less than 50% of your take home pay. Right. And so that is, something to think about as well, is, you know, ’cause when you get paid from the company, there’s social security tax, there’s Medicare tax, there’s federal income tax,and, then if you don’t live in the nine states that do not have income tax, then there’s also state income tax, right? So there’s all of this stuff coming outta your paycheck. And, when you go on disability if you choose that non-taxable election, then you can, you know.
[00:15:52]You’d, you’d feel it a little bit less, if you will because you could have a higher after tax or, or a higher take home pay. Now, why does having flexibility matter? Well, let’s think about it. So let’s say that you’ve been, you know, your doctors advised you that, hey, you know, you may have to have surgery, you know, on your shoulder or on your arm, or, you know, or on your ankle or something like that at some point, or on your knee or whatever, and you’ve kind of been delaying it and you’ve been delaying it. But then he says, well, you know what, man, this is getting pretty bad. Let me go ahead and let me schedule this.Well, if you schedule it for the following year during open enrollment, you can choose or make sure that you have that non-taxable election.So then when you have your surgery you can get that tax free. Loss of license benefit, right? So that’s one thing is if you’ve got something scheduled let’s say that you’re pregnant and you know, we expect the baby to show up within nine months.
[00:16:49]Well if between now and when the baby shows up we go through an open enrollment period. Well, let’s just make sure that we select the non-taxable election. So then when you go on claim, uh, disability claim there, you can have that tax free benefit and you don’t have to worry about paying income taxes on that, right? So, that flexibility is, uh, is nice.and, then also, let’s say that you
have a you’re, you’re senior. and you’re also, you’ve been with the company for a long time. You’ve got a large sick bank and you know, maybe you don’t have that many years left at the company. Or maybe at that point you’re saying, Hey, well you know what? I don’t wanna worry about the imputed income. Maybe I’m not gonna go on disability and you can shift that to the taxable side, right? To save on the taxes paid on imputed income throughout the year. So it really depends on your circumstances. Most things do in financial planning, but I think the nice thing is, and the takeaway here is that you have that flexibility and you have it year by year.
[00:17:46]There’s a couple other things to note, when you’re on disability at Southwest is that your company contributions to your 401k will continue And the amount.that Southwest will pay your NEC. Your non contribution is based off of your average 12 months of earnings, not on your benefit amount. Remember, the benefit amount is 50% of your average 12 months of earnings. Okay, so the fact that your 401k contributions continue, and, in Southwest’s case, your market-based cash balance plan contributions also continue. You know, this is in line with other airlines, uh, at least the NEC is. And you can also keep your healthcare coverage while on disability. So, both of those are pretty substantial benefits and I think, you know, good to understand there. You know, the other thing that Southwest has, which I think is super cool, and this in addition to the COLA, you know, makes this, my favorite loss of license plan out there among the majors right now is you’ve got the income replacement benefit top up.
[00:18:51]Okay. So let’s say that you’ve got a, a really large sick bank and we know your disability payment is going to be 50% of your 12 months average. Well, you can take TFP out of your sick bank and you can top up what your benefit is going to be as long as it doesn’t exceed 100% of your pre-disability earnings. So that’s pretty cool. and quite frankly, if you take the non-taxable benefit, and since that benefit, depending on your tax bracket, could be closer to 75% of your take home pay then, you may not be using as much of your sick bank every period to top that up, to make yourself whole.
[00:19:31]So, I think that’s pretty neat.The other thing is if you have a large sick bank and you’re planning to use it to supplement if you go on disability, then you might look at the union supplemental plans and say, hey, you know what? I need less coverage from the union supplemental plans and then you can save money on premiums there. So I think this benefit to top up the income replacement. Pretty neat. There’s, one question I’ve got for Swapa, so if any of you guys know, ping me and let me know. But, if the pilot uses the TFP to top
up their disability income is the amount that they use, from the bank taxable, like it would be if they’ve used their sick bank during active, flying status.
[00:20:12]So, just curious. You know, I don’t think it’s a reason not to use it. The financial planner in me is coming out and uh, you know, just curious about that. So I think that’s a pretty neat benefit as well. So let’s talk about the union coverage, ’cause you guys do have some short-term and long-term benefits through swap. I’m gonna talk about the long-term benefits. When you look at your documents, you’re gonna see option A and you’re also gonna see option B benefit and with, and the difference there is essentially, you know. Option B, you can get more money to supplement your loss of license than you can in option A. So option A, you can get 10% up to the, your first 25,000 of earnings per month, okay. Of your pre-disability income or pre-disability earnings. So you can get 10% of that. So that’s 2,500 a month. you can get up to 10% of that, and then you could buy it in increments. Okay? So that’s option A, option B is you can get up to 15% of the first $42,000 of monthly pre-disability earnings there.
[00:21:14]And so, you know, that would be,15% of that, would be a $6,300 a month maximum. Now with option B there is a waiting period, right? So, for months three through six, it’s the same as option A. So you’d be at 10% and then at month seven it would kick your benefit up to 15%. So, you know, I think with all of these things, we take a look at it, we say, hey, how much do I earn?How much do I need to fill the gap of what my monthly expenses and then you work backwards and, then that’s where you plug in your, you know, the supplements from the union here. So with that, I mean, that is everything I wanted covered with Southwest. Like I said, this is, you know, my favorite loss of license program.
[00:21:58]I think there’s a lot of goodies in here guys. Let me know what questions you’ve got, let us know how we can help you with your financial planning journey and we’ll see you on the next episode for United.