Should I Enroll in the Survivor Benefit Plan (SBP)?

Updated: Jan 19


Introduction

The decision to enroll or not in the Survivor Benefit Plan (SBP) is a big one because military retirement pay stops when the retiree dies. Therefore, decisions must be made to ensure our military spouses are taken care of financially if we pass away before our spouses. The most popular choices are through the use of the government-sponsored SBP or private life insurance. Which is the better choice? Like any financial decision, the answer is “it depends.” Let’s look at some of the advantages and disadvantages of both options.


The Survivor Benefit Plan (SBP)

The SBP is offered to all service members as they approach military retirement. For a premium, the SBP allows a spouse to receive up to 55% of the pension amount if the servicemember passes away. Important considerations regarding the SBP include:


Advantages:

  • SBP payments are adjusted for inflation with cost-of-living adjustments (COLAs.).

  • Premiums are paid pre-tax.

  • Premiums are paid automatically from the pension (or VA benefits) once elected.

  • There are no medical eligibility requirements.

  • The federal government pays part of the cost so the SBP is typically cheaper than a private annuity would be.

  • Once the retiree has paid 30 years of premiums and has reached 70 years of age, the premium payments stop but the coverage continues.


Disadvantages:

  • For those that are extremely healthy, there’s no discount for excellent health.

  • The SBP is only designed to provide a maximum of 55% of the retirement amount.

  • If the beneficiary dies before the servicemember, there’s no payment and no refund. Therefore, SBP may not be the best option if the servicemember is likely to outlive the military spouse.

  • Once the decision to elect SBP is made, there are few circumstances that allow one to stop it.

  • Once the beneficiary dies, there’s no benefit to share with adult children (a few exceptions here.)

Now let’s look closer at the life insurance option.


Life Insurance coverage rather than SBP:

Some people elect not to pay the premiums for SBP and rather to buy life insurance instead. A couple can purchase enough term-life insurance to provide an income for the military spouse if the retiree passes away before the spouse. When this is less expensive than the SBP premium, the typical strategy is that the difference would be invested.


Advantages:

  • Term life insurance policies may provide required coverage for the spouse cheaper than SBP.

  • If the above statement is true and the saving is invested, the net effect may be a higher net worth to provide income for the surviving spouse and the remaining amounts may be left for heirs.

  • If the first bullet is true, additional savings could be used to provide more term-life coverage that could potentially provide a higher income than SBP would provide the spouse.

  • If a couple is already close to financial independence, a relatively inexpensive term-life policy may be all they need to feel comfortable without SBP.


Disadvantages:

  • Without SBP, when the retiree dies and retirement payments stop, so there are then no inflation-adjusted payments going to the military spouse. More planning and discipline are required to be sure adequate income is provided.

  • Some spouses may be very attached to the security of the military retirement so may have strong desires to enroll in the SBP even if purely numerical calculations might result in an insurance option.


Guidance on the Survivor Benefit Plan (SBP): Your Decision

This can be a very emotional decision for couples and especially for the military spouse. Talking to a fee-only advisor who will not make a commission off the outcome of your decision may prove helpful. Regardless of which option is selective, one critical goal is for the couple to feel like they made the decision together after reviewing all the relevant factors. Retiring from the military brings significant change and stress on most military families so feeling comfortable about the SBP decision is an important way to keep the stress to the minimum.


I'm happy to talk this subject over with you in a complimentary call. As a fee-only fiduciary advisor, I never receive commissions so consider myself unbiased on this topic.



Disclaimer: Nothing in this blog should be considered financial advice or recommendations. Your questions are unique to you and your own personal financial circumstances. You should consult with a financial professional before making a financial decision. See full blog disclaimer.


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