By Carol Church.
Military service members who have earned the right to a military pension typically feel justifiably proud and ready to enjoy this new chapter of their lives. At the same time, there is often more than a bit of anxiety over financial affairs as families make this transition. One major decision that needs to be made for families with a military retiree is whether or not to enroll in the Survivor Benefit Plan, or SBP.
What is the SBP?
The Survivor Benefit Plan can be looked at as a good deal on “life insurance” for survivors of military retirees. Families who enroll in the program pay a percentage of their retirement pay in exchange for a guaranteed income stream to survivors, should the military retiree die. This income streams lasts as long as the survivor is alive. Note that the most the SBP will pay out to survivors is 55% of retirement pay, which is what survivors receive in exchange for 6.5% of monthly retirement benefits. It is possible to pay less and receive less (the minimum benefit is $300). Note also that SBP is considered “paid in full” after 30 years or 360 payments.
Who Can Receive the SBP?
Most service members will choose to have the benefit go to their spouse, but families can have the benefit go to the service member’s minor or college student children, the spouse and the minor/college student children, an ex-spouse (this can also be ordered by a court under the terms of a divorce), or someone who has a “natural interest” in the retiree, such as a business partner.
It’s very important to know, though, that the spouse has a lot of power when it comes the SBP. In order to do anything other than the (most typical) choice of 6.5% pay deduction for a 55% benefit, the agreement and signature of nonmilitary spouse is required. This is also required for any changes down the road.
Why Choose the SBP?
- Reliable source of income; provides peace of mind
The SPD is an easy and reliable way to provide a “safety net” in case the military retiree passes away, since in many military families, this will have been the more primary earner. Many families feel that the peace of mind the plan can offer is well worth the decrease in pension payments.
- No health requirements or health exams
Unlike traditional life insurance, there are no health questionnaires and no requirement that the retiree undergo a health exam.
- It is protected against inflation by COLA adjustments
The SBP benefit is adjusted every December based on the Consumer Price Index so that its value increases along with the cost of living. Typical insurance policies can’t offer this.
Why Opt Out of the SBP?
- No survivors of concern
If a service member is unmarried with no dependents, there is no real reason to opt in. If the retiree later marries or has children, he or she can opt in at that time.
- Some spouses may not need it
If the nonmilitary spouse has his or her own pension, 401K, etc., or if the family is financially well off, he or she may feel she will not need to rely on the military spouse’s pension in this way. It may be more appealing to enjoy a larger payout from the military pension funds now as a couple.
- Dependency and Indemnity Compensation (DIC) benefits (paid out to survivors of service members who die on active duty or from a service-related injury or condition) can interfere
If the family will receive these benefits, they offset SBP benefits. Consider this situation carefully.
- May not be a good choice if the service member is likely to outlive the spouse
If the spouse dies before the service member, no benefits will ever be received from the program (no refunds will be given). This is hard to think about, but should be considered in some cases, such as when there is an age gap, when the spouse is ill, or when the service member is female (since women typically outlive men).
What About Other Life Insurance Plans?
For some families, it’s possible that purchasing a term life insurance policy might offer a more attractive deal than SBP. However, this is only likely to be true if the service member is younger and in excellent health and if the family is willing to do careful research on which policy to buy (consider USAA, Navy Mutual, and the American Armed Forces Mutual Aid Association, among others). The SBP is very trustworthy—it will be there for families, no matter what. Families should also always keep in mind the COLA protections of the SBP, which are attractive and not available for reasonable cost outside the military.
Keep in Mind:
- It isn’t easy to change your mind about opting into or out of the SBP (though there is an opt-out window between the second and third year of retirement). “Open enrollment” periods have rarely occurred—but very rarely.
- If a couple gets divorced, the ex-spouse of a retiree can still be awarded his or her SBP.
- If a recipient of SBP remarries, payments will stop. However, if this subsequent marriage ends in death or divorce, SBP payments start up again.
- Putting children on the plan (minors only, or under 22 if students) in inexpensive and may be worth it.
- SBP benefits, if paid out, are taxable, but the premiums are deducted from retiree pay before taxes, which reduces tax liability.
- If the spouse dies first, no benefits will ever be paid.
- Emotional and relationship issues are a reality when making this decision. Spouses may feel threatened if asked to give up the benefit.
- Taking the CSB-REDUX lump sum (often considered a bad financial move anyway) means you will pay more to get the same benefits.
- Pensions will be lower for those choosing to take the new Blended Retirement System, meaning that SBP should be lower as well. The current High 36 plan pays out at 2.5% times years served (minimum 20) times the “high 3” pay (the average of the member’s highest 36 months of base pay). Meanwhile, the pension members will get under the blended system is less—2% times years served times the high 3 pay. (This is made up for by additional funds in TSP, but that won’t be used to calculate SBP). If SBP is important to your family, this might influence your choice on whether or not to change to the Blended Retirement System.