Life Insurance or SBP? (That’s the military’s Survivor Benefit Plan.)
If I had a nickle for every time I was asked that question – well, I’d be able to go out for a coffee this week. And next week. And every week into the future.
At least once a day, someone asks me some variation of the same question: “I’m trying to decide whether to get life insurance or take the Survivor Benefit Plan (SBP.) What do you think?”
And at least once a day, I type out a multi-paragraph answer. And honestly I don’t have that much time every day, so I’m going to answer it here and then I can just send them the link.
Life insurance and SBP are very different products for very different goals. Life insurance provides a lump sum of money, and SBP provides inflation-adjusted, lifetime income. How much of each you need depends on a wide variety of factors, and most families find that they need some of each. What you shouldn’t do is make it an either-or question, because they’re not either-or products. It’s like asking whether you want a sandwich or a coffee. You might want a sandwich, and you might want coffee, or you might want both, or you might not want either one. But there’s only a small relationship between whether you want a sandwich and whether you want coffee.
The Things You Need To Consider
There’s no right answer to the SBP question, and there’s no right answer to the life insurance question. Each has a use in some people’s overall financial plan, and each has a risk of wasting your money. Questions you need to ask include:
- How old is the retiring service member? How old is the spouse?
- What is the health of each party? Is the retiring service member insurable? At what rates? How long a term can you get or afford?
- Are there kids? How old?
- Does anyone have special needs?
- What are the family’s assets? Liabilities? Anticipated future expenses (like college)?
- Does the surviving spouse work, or would he or she work if necessary? What is their potential earning power?
- Is the retiree planning to work? Is that work dangerous and/or likely to be excluded from commercial policies?
- What other stream of income can be anticipated at which points in the future?
- Which choice will help you sleep better at night?
- Is the surviving spouse prepared to and confident about making a lump sum of money last a lifetime? Do they understand investments?
- Might a surviving spouse potentially remarry before age 55?
- Would the surviving spouse be good at fending off helpful financial advisors and well-meaning (or not-so-well-meaning) friends and family members who know of their lump sum of money? Will the spouse continue to be able to do this as they get older and perhaps has some cognitive decline?
- How will you protect a lump sum from lawsuits, divorce, or being sucked up by medical costs if someone becomes disabled?
The Pros and Cons of Life Insurance or SBP
Obviously, SBP and life insurance each have their own pros and cons. Understanding each product is vital to making a good decision. These charts highlight the major considerations, but please be sure you understand each one thoroughly before making a decision.
How You Might Analyze These Questions
There are many different ways to figure out the “best” choice for your situation. You need to evaluate your needs, and what current assets and income streams can fill those needs. Then you pick the right tool to fulfill remaining needs.
For example, let’s say you are a couple, Mary and Marv Marine. Marv is retiring from the Marine Corps. They have two elementary school-aged kids, a mortgage, and Mary works part-time at the school. Everyone is in good health, and Marv expects to get a job after retiring. Mary has not worked during most of Marv’s career, and has a much lower potential for income because of this. They have $100,000 in TSP. If Marv were to die, Mary would need to get the kids through college, pay off the mortgage, and have income for the rest of her life.
Marv and Mary might want a term life insurance policy with enough value to pay off the mortgage and pay for college, with SBP to provide lifetime income for Mary. They could choose to take out a larger life insurance policy, and skip SBP, but that leaves a lot of what if questions: What if Marv dies very young, and Mary needs that life insurance to last 50 years? What about inflation? How will Mary invest that money to outpace inflation? How will she protect that lump sum from friends, family, and financial advisors who want to take advantage (intentionally or not) of her big chunk of cash? What happens as she gets older and perhaps suffers some cognitive decline? What if she remarries? (See the note on remarriage in the complete SBP article.)
And Another Example
Then let’s take a different couple, Steve and Sue Sailor. Sue is retiring from the Navy, and Steve works as an economist for a think tank in DC. Both their kids are out of college and they rent a condo, with no desire to buy. Steve’s income is enough to carry the rent comfortably on his own, and he would continue working if widowed. Steve has his own 401(k) account with $900,000 in it, and he contributes to it each year. Steve and Sue don’t have any lump sum needs requiring life insurance, and Steve doesn’t need Sue’s income to maintain his lifestyle, so SBP is unnecessary for them.
And a Third Example
Obviously, these two examples are towards the ends of the spectrum. Most people fall somewhere in between, and that’s where it gets trickier. Let’s try a third example, Amy and Adam Army. Amy is retiring. Adam has worked at some duty stations, and he’s pretty good at his job, but he doesn’t have a full resume to attract a high-paying job quickly. Amy has $150,000 in her TSP, and Adam has been funding an IRA every year and has a $150,000 balance in it. They have three kids, two in high school and one in college. They have a mortgage and a car loan. How do they decide on the right choice for them? They might consider a smaller term policy, to pay for the kids college, and partial SBP to supplement Adam’s income and retirement.
I can’t emphasize enough that there are no right answers to these questions, just the right answers for your situation. And absolutely don’t underestimate the “sleep at night” factor – what coverage will give both spouses the peace of mind to enjoy retirement together without worry?
In summary, a friend shared the following wisdom: “Life insurance is for when the insured doesn’t live as long as you expect. SBP is for when the survivors live longer than you expect.”
Do not use just this post to make your decision. There are many resources to learn about SBP, and you can learn about them all here: 10+ Places To Learn About The Survivor Benefit Plan.
Learn More About The Survivor Benefit Plan
This post is part of a larger series about the Survivor Benefit Plan. Here’s the complete list of posts.
Everything About The Survivor Benefit Plan
Retiring Military: Should You Choose SBP?
10+ Places To Learn About The Survivor Benefit Plan
The Survivor Benefit Plan (SBP) “Payback” Period
From The Mailbag: Term Life Instead of SBP
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RussAnn Larrabee says
I am a friend of a widow of a retired service member who died of a service connected disability. At the time of retirement he elected to NOT accept SBP. He died within one year. He overdosed in their bathroom. I want to know if she can fight this? He made a poor decision for her and his children. He wasn’t well enough to make this decision. Yet, the military allowed him to make this decision. Is there anything she can do? Is there ever an instance/ reason she can receive this benefit they both invested in for 20+ years?
I can’t answer your question directly, but there’s something you should be aware of. As far as I know, the service member CANNOT decline SBP without the spouse’s concurrence and signature. Prior to retirement the service member submits a DD FORM 2656, and this is the form on which they make their SBP election. If they choose anything other than full SBP coverage, it requires the spouse’s signature along with a notary/witness verification. Unless the spouse’s signature and notary’s stamp were forged, the first hurdle you’re going to have to cross is answering the question, “Why did she agree to decline SBP coverage?” Not trying to be a downer, but I wanted you to be aware.
Kate Horrell says
Thanks for your comment. It’s a valid question for many retirees. But be aware that this didn’t become the law until March 1986. Prior to that, the decision was 100% on the retiree.
We have a whole generation of surviving spouses whose service member retired before 1986 who did not have a legal right to be involved in the SBP process. Those service members are now in their 70s, 80s, and older, we do have surviving spouses just learning that they aren’t eligible for SBP – through no action their part.
Doesn’t sound like it is the case in this commenter’s situation, but it is often true for older folks.