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Learn how to avoid the sunken costs of the government insurance programs Survivor Benefit Plan (SBP) and Veterans Group Life Insurance (VGLI)
When it comes to planning for their financial future, many veteran families don’t understand the true value of their service. This is reflected not only in the way that veterans approach the standard post-military-job-hunt, but also in their acceptance of the status quo military financial planning “benefits” when they retire. There are two issues that many military and veteran families don’t understand:
RMC is the combined amount of your military pay, which includes your basic pay, average basic allowance for housing, basic allowance for subsistence, and the tax advantages you enjoy by not having to pay taxes on these allowances. All military personnel have a RMC based on their pay grade, years of service, and family size. You watch a video on how to calculate your own RMC here.
The big takeaway here is that you are making more money than you probably think you are. If it is your intention to look for a salaried job post-military, and you are thinking in terms of matching your basic pay, then you are not asking for enough money. You are setting yourself up for a significant pay cut in civilian life. Just look at how much is allocated tax-free for housing allowances. Shockingly, these benefits are often forgotten about by Veterans when searching for a new career.
The Survivor Benefit Plan doesn’t reflect the true value of service.
Military spouses are required to make a major financial decision around the time their spouse retires: whether or not to accept the Survivor Benefit Plan (SBP). The SBP is a form of life insurance that is designed to provide a basic level of support in the event a retired veteran predeceases their spouse. It is offered without qualification to all retiring veterans. Rather than paying out a lump sum to the beneficiary like most life insurance policies, it pays a portion of the deceased veteran’s retirement pay each month, for the remainder of the surviving spouse’s life. I say that this is a major financial decision because once you accept the SBP, you are locked into the program for life, and this “benefit” isn’t free. Here are a few quick facts about the SBP:
Essentially, when the veteran dies, the value of his or her pension (and military service) is halved.
Service Members Group Life Insurance (SGLI) is the government-sponsored life insurance provided during active duty military service. SGLI coverage ends with active duty. VGLI, which is administered by the Veterans Administration, is offered to veterans as a replacement for SGLI. There is no qualification required if coverage is accepted within 240 days of service, which makes it a good option for the service member with a life-threatening disability who is thus unable to qualify for privatized life insurance. But for most retiring service members, VGLI has some definite disadvantages.
In order to show how these status quo financial planning options are undervaluing your military service, let’s look at a scenario:
A 40-year-old retiring male E7 with 20 years of service has an active duty RMC of $104,000 a year (see table column A.) He will receive an annual pension of roughly $30,000 (See table column B). If his spouse elects the SBP, if he predeceases her, she would receive 55% of the pension, $16,500 a year (E) or about $1,375 per month until she, also, passes.
So what is the true value of the E7’s pension, and will the veteran and the spouse receive that true value in this scenario?
To answer that question, we need to do a little math.
Let’s assume that the E7 lives for 30 years beyond his military retirement, to the age of 70. That $30,000-a-year pension (B) paid out annually over 30 years, including adjustments (2.5%) for inflation over the next 30 years, amounts to a total of $778,000 (D). This is the amount of money that the E7 would need to have RIGHT NOW, invested in an account that’s earning at least 4% interest, in order to generate a $30,000 a year annuity. In the event that the E7 dies, his spouse will only receive 55% of that pension, or $16,500 a year (E). If the spouse receives SBP payments over a 30-year period, the value of those payments, again adjusted for inflation, is $531,000 (F), significantly less than the true value of the pension (and the E7’s service) over that 30-year period.
Is there a scenario in which the surviving spouse could realize the full value of the E7’s pension through SBP payouts? Sure. The spouse would have to receive an SBP payment of $1,375/month for over 58 years in order to realize $778,000, a situation which is highly unlikely. To add insult to injury, that 6.5% SBP premium payment is deducted pre-tax, so the spouse’s SBP payouts are taxable, reducing, even more, the amount the surviving spouse can expect to receive, and increasing even further into the realm of improbability that she will ever see anywhere near the true value of the E7’s pension via the SBP.
The E7 whose spouse accepts the SBP is paying $1,950 a year for that protection (6.5% of the $30,000 a year pension). He is used to paying $300 a year for SGLI. However, VGLI, which replaces SGLI upon retirement, is significantly more expensive than SGLI, because the amount of government subsidy significantly decreases. ) In year one, the cost of VGLI is $800 a year (vs. $300 a year being paid for SGLI). Now the retired E7 who was used to paying $300 a year for insurance to protect his family is paying $2,700 a year ($1,900 for the SBP + $800 for VGLI), an increase of nine times. And every five years, the costs will go up, since the cost of VGLI goes up on a set scale every 5 years for everybody, regardless of health. Over a 30-year period, during which the E7 is statistically unlikely to die, he will have contributed over $180,000 into the SBP and VGLI.
If the spouse predeceases the veteran, the family will see much less return on this investment. If the veteran predeceases the spouse, and both SBP and VGLI are paid out, the spouse will receive a maximum of $400,000 in a death benefit (if they elected the maximum coverage), an amount which will keep the spouse going at their $104,000 a year lifestyle for only four years. The surviving spouse is being set up to struggle over the long term, with no opportunity for the E7 and his spouse to leave a legacy for the next generation.
For the sake of the scenario, let’s assume that the E7 dies around 30 years after retirement at the age of 70 with the VGLI still in force, and the spouse, who is the same age, lives for another 18 years. The best case scenario here, with regards to return on investment (ROI), is that a) the E7 dies, and b) the surviving spouse receives $400,000 from the VGLI death benefit, and $297,000 in TAXABLE SBP payouts ($1,375 a month for 18 years), for a gross ROI of $697,000 – hundreds of thousands of dollars less than the true value of the E7’s pension ($967,000), even before accounting for having to pay taxes on the SBP payouts. But wait, let’s not forget to subtract the $180,000 the E7 and his spouse paid for this coverage, bringing their net ROI down to $517,000, approximately half of what the E7’s pension was worth adjusted for inflation over 30 years, AND there is no legacy for any children when the E7’s spouse passes away.
There are other options that will truly value your military service.
Here at US VetWealth, we have designed an alternative to the status quo military financial planning options.. Our solution offers equity growth (as interest is credited based on the S&P 500 performance, not the federal bond rate) and a lot more liquidity that the retiree can access while still alive. It offers a safeguard against negative market returns, and allows its owner to both comfortably fund their retirement and do what the SBP can’t possibly do, allow you to leave a legacy behind you when you die. We call it your Survivor Liberty Plan.
This completely new approach to privatizing the SBP or pension protection has become available in recent years; however, few financial experts and professionals are aware of this solution and the game-changing benefits it brings to solving the SBP problem. Modern life insurance can provide the death benefit protection of a term policy like the VGLI while also producing an annuity stream much like the SBP; to be more accurate, it can provide an annuity stream much like the pension, because the payouts are higher, and you can use it while the veteran is still alive! Further, after 30 years, the costs are significantly lower than an SBP, and the ROI is significantly higher than on VGLI, a term insurance or whole life policy. It also costs less than the fees involved in typical Thrift Savings Plan (TSP), 401k, mutual funds, or other retirement plans that come along with money managers all taking a cut of the investment, regardless of the plan’s performance.
If this interests you, then click here to learn more about the Survivor Liberty Plan.
Scott R. Tucker is an author, speaker and the founder of US VetLife/US VetWealth, a lifestyle and financial consulting brand that helps service members go from paychecks and government benefits to wealth and liberty. He likes to say, "I Help The 1% Who Serve Our Country Become The 1% Who Influence It." A West Point graduate, serial world traveler, military financial expert, and entrepreneur, Scott brings valuable experience and insight to those who have sacrificed so much in service to our country. He's the Rosie Network's #1 Fan and a passionate supporter of the Veterans Cannabis Project.
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