Survivor Benefit Plan: Protecting loved ones after service

When you retire from the military, you’re faced with a lot of decisions: Where do you want to live? Where do you want to work? What Survivor Benefit Plan, or SBP, decision do you make? It can be a lot to deal with — trust me, I’ve been through it.

These are the decisions I needed to make when I retired from the U.S. Air Force Reserves. But don’t let yourself become so overwhelmed that you don’t give the really important questions — like the one about SBP —enough thought. SBP plays a critical role in your family’s financial future, so let’s look at it to help you make an informed decision.

What’s the Survivor Benefit Plan?

SBP’s a great benefit for military retirees. It’s an important piece of their overall protection and retirement plan. Typically, military retired pay stops when the retiree dies, but SBP makes sure their beneficiaries will continue to receive a percentage of their retired pay each month after they die.

Understanding SBP terminology

There are three key terms you need to know:

• Military retirement pension: This is the amount you receive each month as a military retiree.

• Base amount: This is the amount of your military retirement pension that you select as the “base” for what is passed on to your beneficiary. Your beneficiary will receive 55% of this amount.

For example, let’s assume that your monthly military retirement pay is $2,000. If you select the entire amount as your base amount, your beneficiaries will receive 55% or $1,100 per month when you die. If you only elect $1,500 as the base amount, then they would receive 55% of $1,500 or $825 per month. In either situation, coverage will increase if retirees are awarded a cost-of-living adjustment.

• SBP premium: The cost paid for the benefit of passing some of your military retirement pay to your beneficiaries. There are several options for SBP beneficiary, ranging from spouse only to children only to insurable interest. Each has their own costs that you can check out.‍ ‍ ^{See note 1}

SBP premiums are deducted on a pre-tax basis and stop once the retiree reaches age 70 and has paid 360 months of premiums or dies. This is important to understand as you evaluate the true cost of other alternatives.

The following is an example of how SBP premiums work. This calculation works even if the cost of SBP increase or decreases. Both of these examples use spouse-only coverage, which currently costs 6.5% of the base amount.

The SBP decision analysis

Let’s walk through the SBP decision step by step and hopefully, it’ll guide you to making the best decision for you and your family.

The decision comes down to two simple questions.

1. Do you need the protection SBP offers?
2. Is SBP the most cost-effective way to provide this protection for your family?

In most cases, USAA believes that SBP is the most cost-effective solution. Let’s review a few details.

Should I take the Survivor Benefit Plan?

This is an important question to answer. While there is a cost for this benefit, USAA believes that most military retirees will enjoy valuable, cost-effective protection offered through the SBP and should take full coverage upon retirement.

Because most military retirees, me included, have a beneficiary who relies on them financially. Not having military retirement continue after you die could cause them financial difficulty. If this applies to you, then SBP is probably a good idea.

However, SBP may not make sense for some people. The following are a few examples:

• What if the beneficiary doesn’t and won’t rely on any portion of the military retirement? Maybe they’re independently wealthy or have their own military retirement. They don’t need to rely on your SBP to maintain their standard of living.

• What if the military retiree doesn’t have any dependents? Therefore, there is no one to pass the survivor portion to. In the case when a military member is unmarried at retirement, they may elect SBP coverage in the future if they get married. However, there is a critical deadline that must be met to activate the coverage. The election will need to be submitted prior to the first marriage anniversary.

Those are just two examples, but there are other times when SBP might not be valuable. But, in general, most families rely or will rely on their military retirement paycheck and losing it would cause financial hardship for their families. This is illustrated through these situations:

• Situation 1: The military retiree dies shortly after military retirement. If they were the main breadwinner, the family loses two income streams — the main income from any civilian job and the supplemental income provided by the military retirement paycheck.

Value of SBP: The beneficiary spouse receives income to help support the family reducing financial stress. This example isn’t limited to those who die shortly after retirement.

• Situation 2: A couple’s retirement plan indicates they need $1.5 million to fully retire. But due to difficult market conditions, job problems or even health problems, they only have $500,000 saved at retirement.

Value of SBP: The SBP offers peace of mind by providing extra income that will help the civilian spouse not outlive their retirement savings when the retired service member dies.

What do Reserve and National Guard retirees need to know?

Retirees from the Reserve or National Guard have a slightly different decision to make for their Reserve Component Survivor Benefit Plan, or RCSBP. This is due to the “gray area” period, the time between when they retire from the military and when they begin to receive their military pension, typically at around age 60. I’m currently in the “gray area” period.

If you’re a Reserve or National Guard retiree, check out this article to better understand your RCSBP decision. It explains the differences between Option A, B and C but USAA believes in Option C. It’s also what I chose for my RCSBP.

Comparing the SBP to life insurance

Let’s start with a worst-case scenario: You die tomorrow, and you have chosen your entire retirement paycheck of $2,700 per month as the base amount. That means SBP initially provides $1,485 per month of income to your spouse. In this case, we assume that you and your spouse are both 42 years old, in average health and you retired after a 20-year career.

The question becomes, how much money would it take today to provide what SBP provides — $1,485 per month to your beneficiary — for the rest of their life? In short, what’s the value of SBP payments over time?

After doing some calculations, we find that the approximate value of SBP in this case is $440,000. In other words, that’s how big of a pot of money you would need today to be equal to the value of the SBP paid out over time. If your spouse had $440,000 the day you died, they could turn that into $1,485 per month for the rest of their life with a 2% annual inflation adjustment.

Could you provide your spouse with a $440,000 pot of money today? Most of us don’t have that kind of cash just sitting around. So how can we get that pot of money?

One option would be for the military retiree to purchase a $500,000 permanent life insurance policy. With the spouse as the beneficiary, they would be able to turn that $500,000 from life insurance into monthly income.

Why use permanent versus term insurance? While term insurance would likely be less expensive than permanent life insurance and less expensive than SBP, term life insurance would one day go away, and the financial need might not. Permanent insurance can last a lifetime.

So, which is cheaper? Paying the SBP premium or purchasing the life insurance?

Here’s a breakdown of the costs. Keep in mind that life insurance premiums will vary by person based on health and age, so this is just an example. Using the assumptions earlier in this article, here is a comparison of the costs:

• SBP premium per month for spouse coverage: $175.50 or $2,700 x 6.5%

• Permanent life insurance cost per month for a male: $763.29 if you pay until age 65

Using this example, let’s say you die at age 65. What will you pay for this protection?

• SBP coverage: $175.50 per month for 23 years = $48,438

• Permanent life insurance: $763.29 per month for 23 years = $210,668.04
  

Notice the difference? That’s one reason USAA believes in SBP.

Additional considerations

Here are some additional considerations as you make this decision:

• If there is a significant difference in the life expectancies between you and your spouse, SBP can become increasingly valuable. For example, if the military retiree has a terminal diagnosis or is significantly older than the spouse, there’s a chance that the beneficiary will receive SBP benefits for a long time.
• If you started a family after your military service ended, you now have an opportunity to pass some of your military retirement to your beneficiaries.
• If the beneficiary spouse dies before the military retiree, the retiree can pass their SBP benefit to their new spouse if they remarry.
• It’s fairly simple. When the military retiree dies, the beneficiary doesn’t have to make any decisions of what to do with a big pot of money and how to turn that into a paycheck. Removing this one decision off their shoulders can make a huge difference when you consider all the other decision that need to be made when someone dies.

Is it possible to not benefit from SBP?

The short answer is yes, and this needs to be a part of your decision process.

Let’s say that in the previous example, the beneficiary spouse died a year before the military retiree. In this case, you would have paid $48,348 in SBP premiums and might not have a qualified beneficiary to pass the benefit to.

However, if you were paying for permanent life insurance, you could choose someone else as the beneficiary and still receive value. You could even tap into the cash value for your own benefit.

Also, what if the beneficiary spouse dies only a year after the military retiree? They would receive approximately $17,820 from SBP or $1,485 per month for 12 months. But, if you had taken the life insurance, there should be more than that left over out of the $500,000 policy that could pass to others in accordance with their will or trust.

While these last situations could be considered negative — after all, you paid more into SBP than you got out — it was valuable protection and financial peace of mind at a more affordable price, and you potentially had this for decades.

The opposite extreme could also happen. What if the military retiree dies a day after military retirement, having only paid 1 month of SBP premiums. The beneficiary benefits for years for a very small cost.

In short, many — if not most — people will find value in signing up for SBP. If the worst happens for your family and the military retiree dies, you family will be grateful for the financial support. No matter what your decision is, be prepared for SGLI to go away when you retire and have a plan to replace it with private life insurance.

The SBP decision is just one of many you’ll make as you retire from the military. USAA is here to support you throughout the entire military retirement process.