From the Mailbag: Term Life Insurance or SBP?

Term Life Insurance or Survivor Benefit Plan?

Recently, I received the following question:

My husband is now facing retirement. He will retire as an E7 with 26 years of service.  We have decided to go with term life insurance.  However, I have not signed off on the Survivor Benefit Plan yet. At his retirement date, I’ll be 56 and he’ll be 49.  I feel the Term Life route makes more sense. I do know, because he’s almost 50, even the term rates will be high.  He’s been diagnosed with sleep apnea, so, although he’s pretty healthy, that is in his record. But he’s a smoker. He’s tried to quit several times.  We have seven months until his retirement date.

After a couple of emails, I found out that the wife also has adult children and has a couple of small retirement accounts.  Her husband has no interest in obtaining a post-military job.  She is starting her career as a professor, but still feels as though she depends on her husband for income.  She wants to work until she is physically unable to.

Considerations

There are a couple of factors at work here.

1. Time.  They have 7 months to decide about SBP.  However, they can always choose SBP, then cancel between the second and third year after retirement if they are able to obtain a satisfactory insurance policy.
2. Insurability.  It seems that the husband’s age, smoking status, and medical history might cause their insurance to be pretty high.  However, an insurance company might still offer a high risk policy.  It makes no sense trying to compare the cost of insurance to the cost of SBP without having a quote in place.
3. What is being insured. They don’t have children at home.  If the husband does not get a post-military job, there’s really no income to insure, except for his pension.  That’s what SBP was designed for…to protect pension income.
4. What would life insurance do in this case? When it comes to obtaining life insurance, the primary focus is to protect against the loss of potential future income.  If SBP is covering the loss of the husband’s pension, and he doesn’t take on a second career, there really isn’t anything to protect.  In this case, selecting the amount of life insurance is arbitrary.  You could pick $500,000 or $5 million.  But there’s not really any methodology you would be using here.  The closest thing I could imagine would be to calculate all the long-term debt (mortgage, car loans, other outstanding loans, etc.) and insure against that amount

My answer

After a decent amount of discussion, my answer was fairly straightforward:

Start by getting a quote. While SBP might be ‘the right answer,’ there’s no way to compare numbers without getting life insurance quotes.  You can find quotes yourself using USAA’s online tool, or you can find other quote tools online.  However, without income to protect, it’s hard to determine a policy amount, other than what you can afford.

Don’t give up on SBP. The facts in this case seem to heavily favor taking the Survivor Benefit Plan.  Although the husband does not want SBP, it’s not his choice.  It’s the dependent spouse’s choice.  In most cases, SBP is a good way to go, particularly if you:

• Have adult children. If your children are out of the house, then life events are easier to manage.  Selling a house, downsizing your car, living on a fixed income…those are all things that are more manageable when you’re the only person impacted.  The fact that you don’t need to worry about paying for college is a huge relief here.
• Have health concerns. Even though she’s older then her husband by almost ten years, it seems that she’ll probably still outlive him by a lot.  In this case, she’ll probably receive at least some SBP payout, and probably more than what they pay into it.
• Want to protect future income. It’s what SBP was designed to do, frankly.  When the Survivor Benefit Plan was first approved in 1972 specifically as “an income maintenance program for the surviving dependents of deceased service members.”  In other words, this scenario is the exact reason one would have SBP in place.

Don’t be afraid to revisit. Remember, you can opt out of SBP between the second and third years after retirement.  You still have time to review SBP resources and reevaluate if anything changes with the program or your circumstances. If you’re concerned about obtaining an insurance policy before you exit, you might want to keep SBP while you’re still looking at your insurance options.  If you find the policy that you want, and you’re pretty sure that you’ll be fine without SBP, you can drop it during that window.  However, you’ll want to ensure that your retirement plan is intact.  In other words, you’ll want to plan on financial independence when your term policy expires.

Conclusion

I love answering readers’ questions.  Most of the time, there is no ‘right’ answer, there’s just the answer that’s right for your situation.  However, I love the dialogue, and the interaction.  In this case, I hope that we reached the right answer for their situation.

What do you think?  Do you have a question that you’d like to discuss?  If so, please post your comments below.