The decision whether to choose Survivor Benefit Plan (SBP) coverage is very personal, and very important. Military retirement pay ends with the death of the retiree. The SBP allows you to purchase an annuity that provides lifetime, inflation-adjusted income to an eligible survivor. This (relatively) irrevocable election occurs at retirement, and requires the agreement of the spouse for anything less than full coverage. The SBP is one of the many options to provide for survivors, and should be considered in light of the rest of your financial picture. There are a lot of pros and cons to the military’s survivor benefit plan. Here are ten things to consider while you choose SBP coverage:
Your Overall Financial Picture
Every family has a different financial structure. Details can make a huge difference in whether the SBP is right or necessary for you. How much of your total retirement income comes from military retirement pay? Do you have other retirement funds, other income streams, or assets that could be used to provide income? How much will your living costs change if the military retiree passes away?
It’s possible that other sources of income will cover estimated living expenses for survivors. In that case, there is no need for SBP.
Another option is to cover only a portion of retirement income. SBP pays 55% of the covered amount, called the base amount. The base amount may range from $300 to full retirement pay. While most conversations about SBP are around full retirement pay, selecting a lower amount may be right for your situation.
For many families facing retirement, the question is whether to elect the SBP or whether to purchase commercial life insurance.
Military retirees are eligible to purchase SBP coverage at retirement regardless of illness, injury, or health history. Depending on your situation, this can be invaluable. Many military retirees are unable to purchase affordable life insurance on the open market. Even worse, some can’t purchase it at all because of their health situation.
Obviously, none of us can guess how long we’re going to live. If we could, the SBP decision would be a lot easier. We can, however, make some educated guesses, using actuarily tables, family history, and health factors. The decision to select SBP coverage is more logical if you expect the surviving spouse to live long after the death of the military retiree.
If you’re deciding between commercial life insurance and SBP coverage, taxes may be a consideration.
SBP premiums are paid with pre-tax dollars, saving money during the premium payment phase of the process. SBP benefits are taxable to the beneficiary after the service member’s death.
Commercial life insurance is paid with money that has already been taxed, but the benefits tax-free.
The benefit of one versus the other will depend on your individual factors, particularly the tax bracket you are in during the premium payment phase versus the benefit payment phase of the policy.
Under the SBP, you have the option to provide coverage for children, either separately or in conjunction with spouse coverage. This would provide SBP payments until age 18, or 22 if a full-time student. A child who is disabled and incapable of self-support remains eligible if the disability occurred before age 18 (or before age 22 if a full-time student). Marriage at any age will terminate a child’s eligibility.
Many people initially think that they will skip child coverage because the surviving parent will be covered, but look at the costs before making a decision. Child-only SBP coverage is quite inexpensive, but adding children to SBP spouse coverage is incredibly cheap. We’re talking pennies per month. If you are electing spouse SBP, it is definitely cost-effective to add child coverage.
If you have a disabled child, then the choice to elect SBP coverage on your children is fairly obvious. Disabled children may continue to receive those inflation-adjusted benefits for their lifetime, provided they remain unable to support themselves and do not marry. SBP benefits may be paid into a Special Needs Trust, allowing the child to continue to receive needs-based government benefits.
The SBP-DIC Offset
SBP benefits are offset (reduced) by the amount Dependency and Indemnity Compensation (DIC) benefits received from the Department of Veterans Affairs (VA.) DIC is a monetary benefit paid to eligible survivors of service members who died in the line of duty, or eligible survivors of veterans whose death resulted from a service-related injury or disease.
For purposes of the SBP discussion, DIC may be payable if the retiree dies from an injury or illness “deemed to be related to military service,” or if the retiree was rated as totally disabled for at least ten years immediately prior to the death, or continuous since the end of active duty and for at least five years prior to the death.
If your SBP benefit is less than the DIC amount, then the entire amount of SBP may be offset. If eligible, the beneficiary will receive the full DIC payment regardless of the amount of SBP offset. In addition, the DIC benefit is non-taxable, providing a higher net income than an equal amount of SBP benefit.
If your SBP benefit is more than the amount of DIC, you will receive both DIC and the amount of SBP that remains after the DIC offset. The two benefits will total the income of the elected SBP coverage, but the DIC portion will be tax-free, resulting in a higher net income.
Understanding the SBP-DIC offset may impact your decision regarding SBP. You will have to consider not only the likelihood of survivors receiving DIC benefits, but also the amount of DIC for which they would be eligible vs. the amount of SBP benefits you’re purchasing.
Beneficiaries who have their SBP payments reduced due to the receipt of DIC benefits will receive a pro-rated refund of premiums paid into the SBP program.
If a SBP recipient remarries prior to age 55, SBP payment stop. They may be restarted if the subsequent marriage ends due to death, divorce, or annulment (pretty much any reason.) A friend of mine falls into this category, and she has successfully had her benefits reinstated.
If a SBP recipient remarries after age 55, there is no change to his or her benefits.
Obviously, you can’t guess whether a surviving spouse will remarry, but you can know some things. First, how old are both parties when choosing whether or not to elect SBP? If the spouse is closer to age 55, the chance of there being a death and subsequent marriage before that cutoff decrease. Also, does the spouse have any religious or cultural beliefs that would increase or decrease the chances of remarriage? These may be clues as to whether a surviving spouse may remarry, and when.
The Opt-Out Window
While SBP elections are generally irrevocable unless there is a qualifying life event, there is one window during which an SBP election can be revoked. If you elect SBP coverage at retirement, you may terminate the election between the 25th and 36th month of retirement.
If you’re really unsure if you want or need the SBP, it might make sense to elect coverage at retirement, and then re-evaluate during the termination window. You can use those two years to gather more information and complete tasks such as obtaining commercial life insurance and completing the VA disability claims process. If you terminate coverage during this window, you will not receive any refund of premiums paid.
The Sleep-At-Night Factor
Many times, couples break down their SBP decision to straight math. While I absolutely advocate knowing the math, you also have to consider the emotional aspect. The lifetime, cost-of-living adjusted income of SBP may provide peace of mind and security in a way that a one-time life insurance payout can’t. Alternately, you could spend your nights being irritated by the cost of SBP premiums. You may not be able to completely anticipate how you’re going to react, but you might have some ideas. One of the purposes of insurance is provide a sense of security, so be sure that your SBP choice makes you feel good.
Is There A Survivor Benefit Plan Calculator?
A LOT of people want a simple, objective calculator that will tell them whether to choose SBP or other retirement income options. Seriously, I would be SO popular if it was possible to create one. Unfortunately, as you can see from the considerations above, it’s not an objective decision. It is a subjective decision that is made using part facts and part feelings. No calculator can effectively determine what is right for you. In fact, with so many variables, it is almost possible to create an equation that will tell you whatever you want to hear. This is the reason why I don’t particularly endorse any SBP analysis that comes up with a set answer, and why I always say, “It depends.”
Every family has a unique set of factors to consider when considering SBP. Think about these ten thingsas they apply to your long-term financial plans and figure out what works best for you and your family.
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