How to Avoid the Pitfalls of SBP and VGLI at Military Retirement

By Scott R. Tucker

November 25, 2019

Benefits, Life Insurance, Pension, SBP, Survivor Liberty

The last twelve to eighteen months before military retirement is characterized by a firehose of retirement briefings. For most, this is a time of information overload, uncertainty, and possibly fear. And it is during this time that Uncle Sam requires a retiree to make a financial decision that can impact a military family for generations. The decision is whether or not to accept the Survivor Benefit Plan (SBP) and Veterans Group Life Insurance (VGLI). 

Created in 1972, the Survivor Benefit Plan (SBP) is a form of life insurance that operates as an annuity. Instead of paying out a lump sum to the beneficiary like most life insurance policies, it pays out a portion (55%) of the member’s retirement pay each month until the survivor either passes away or is no longer eligible to receive the payments. It was designed to provide a basic level of support in the event a retired veteran predeceases their spouse. The SBP costs the same for everyone—6.5% of their pension, deducted automatically from their pension check—and is payable only upon the death of the insured veteran.

VGLI is administered by the Veterans Administration. It is presented to the veteran as a replacement for Servicemembers’ Group Life Insurance (SGLI), which is the government-sponsored life insurance provided during active duty service. VGLI is presented as a benefit because there's no qualification required if coverage is accepted within 240 days of service. This is a good option for the service member with a life-threatening disability who is thus unable to qualify for privatized life insurance. But many of our veterans without life-threatening disabilities who are paying into this program are not fully aware of the severe structured cost increases that occur as they get older. The price of VGLI goes up every five years, and it's a fixed cost for everybody. It's easy to calculate exactly how much someone will be paying into this by referring to the cost table provided by the government.

Service Members and Their Families are Poorly Educated about SBP, SGLI, and VGLI

Retirees and their spouses are often shocked to discover the costs involved in both survivor benefit protection and replacing SGLI with VGLI. Spouses are often shocked to learn how little they’ll receive in survivorship payments if the worst actually does occur.  

SBP, SGLI, and VGLI are all presented as benefits, even though the service member and veteran are paying for them. Government insurance packages are still insurance, and these policies are managed by a for-profit company by people who don’t work for free. The only aspect of these plans that are given to the service member or veteran is the guarantee of coverage without qualification. 

Many retirees and their spouses think that SBP is the only option available to give the surviving spouse some financial protection if the retiree dies. Little to no guidance is offered regarding alternative, privatized options on the free market. Because it is presented as part of the government retirement program, many retirees who are well used to following orders without question feel compelled to enroll in SBP and VGLI, committing themselves to the program for the rest of their lives. 

In fact, 80% of career service members do this. This means millions of dollars of taxpayer-funded benefits are being redirected right back to the government each year to fund existing SBP payments or to pay a third-party contracted insurer (Prudential). Similar to social security, the continuity of the program depends upon each succeeding generation paying into it, so the government does its best to entice its employees to enroll rather than encouraging military families to ensure they are doing what is in their best interest. Of course, there are plenty of circumstances in which the SBP/VGLI combo ARE in a military family’s best interest. But if the status quo path leading from military service, to 9-to-5 grind, to retirement doesn’t inspire you, then we’re glad you found this page, because here at US VetWealth, we’ve got a better option for you.

The Problems with the SBP

SBP is offered without qualification to every retiree, regardless of their age, health, disabilities, physical condition, life expectancy, or any other factors. Both of these things make SBP sound like a good deal; the problem is that those are the only arguments made. The SBP does have some drawbacks:

  • It is expensive, and there is very little likelihood that a retiree’s spouse (or a child under 21) will ever actually receive any tangible benefit from it. 
  • If the spouse predeceases the service member, then all the funds that have been paid into the plan are simply a loss. This is worth considering in cases where there is a significant age gap, the spouse is ill, or the service member is female, since women are statistically likely to live longer than men. 
  • The SBP only pays a benefit if the insured dies. There is no equity or return on investment while the insured retiree is still living.
  • Children over the age of 21 cannot be beneficiaries. If the spouse dies at any point after the retiree, if all children are over the age of 21, SBP payments stop.
  • The SBP is complicated to manage during major life events like divorce, and there is a risk of losing the benefit. 
  • If the insured retiree doesn’t die within the 30-year term of the payment plan, then there is a significant (hundreds of thousands of dollars) opportunity cost.
  • It takes much longer to start receiving SBP benefits than it does to receive payments for other life insurance products (well, it is the government). It takes a minimum of 45 to 60 days to start receiving benefits, assuming there are no problems handling the paperwork (again, it is the government, ahem). Other life insurance products will send you a check for the full death benefit tax-free within a week or two.

How the SBP Works

A retiree gets one chance to make the decision whether or not to take the SBP. The decision must be made at retirement, or within a year of a change in life circumstances, like remarriage or parenthood. If the veteran has a spouse at retirement, then there is no choice. The spouse and children are automatically enrolled at full coverage (6.5% of the pension) unless the spouse elects a lower amount or declines coverage. The decision as to whether or not to take the SBP rests SOLELY with the spouse, who must opt out with a notarized signature. 

There is no requirement to qualify during the underwriting process. This may seem like an advantage, but a plan that doesn’t have qualification requirements isn’t an advantage for someone in excellent health, who could qualify for a much lower premium rate in the private marketplace. 

True, the SBP can provide a monthly check to help pay the bills in the event that a service member or veteran dies prematurely. In the long run, however, the amount of money the beneficiary receives in that annuity is usually considerably less than what the monthly premium amounts could have generated as investments and insurance in the private marketplace. And your SBP payments? Like social security, they are going to some pot of money the government controls and helping to fund current SBP survivorship payments. They are not being saved and grown somewhere in order to fund your spouse’s SBP payments thirty years from now.

If you have sat through a military retirement SBP briefing then you have no doubt heard the argument that SBP premiums are “paid up” after 30 years, meaning that there is a cap on premium payments, while the SBP annuity is paid in perpetuity for as long as the spouse lives. Therefore, even a surviving spouse of a retiree who paid into the SBP for the full 30 years only needs to receive the annuity for just under 2.5 years beyond those 30 years in order to have recouped the total amount the couple spent on premiums, and the spouse is likely to receive more in annuity payments than was paid into the plan. In some cases this will be true. However, what was paid into the SBP will be a complete loss should the spouse predecease the retiree, and annuity payments stop when the spouse dies, which means that there is no opportunity for the amount of money the retiree and spouse have paid into the SBP plan to provide a legacy for their grown heirs.

A further matter for consideration is that there is no survivor payment on disability income. If the retiree’s disability payment makes up a significant portion of the income that his or her family depends on, that income is simply lost when the retiree dies, regardless of whether or not the SBP has been elected.

The ONLY way that the SBP makes good all-around financial sense with regards to ROI is if a service member dies within a few years of retiring. 6.5% of his/her pension adjusted for inflation, deducted over a couple of years, in return for 55% of his/her pension, again adjusted for inflation, to be paid to the spouse for the rest of the spouse’s life sounds like a pretty good deal, as long as the insured retiree dies within a few years of retiring from the military.

The Problems with SGLI/VGLI

When the topic of life insurance comes up during active duty service, it is usually about the SGLI, and the response is typically, “I’m good for insurance. I don’t have a family yet, and SGLI will take care of it for me when I do.” 

This creates a tremendous risk of never being able to qualify for a privatized option in the future, should some medical issues come up during service. It is in everyone’s financial best interest to qualify for private insurance when they are young and healthy and not wait until they are in their thirties and forties and leaving service with a number of medical issues. SGLI ends with active duty, so using it as a safety blanket backfires time and again when transitioning service members are not able to qualify for any other life insurance options and have no choice but to take VGLI This a shocking oversight with a costly outcome. 

Just how costly?

An E7 with 20 years of service is used to paying about $300 a year for life insurance (SGLI). When SGLI is replaced with VGLI at retirement, those payments are no longer being subsidized by the government, so they get much higher. In year one, the cost of VGLI is $800 a year (vs. $300 a year being paid previously). And every five years, the costs will go up. If he wants to ensure he leaves behind the (mere) $400,000 death benefit for his spouse, by the time he reaches the age of 75, he’ll be paying $1,840 a month for this coverage. 

These costs are so astronomical that it’s unrealistic to expect that any veteran who's living off their pension will be able to keep up with them. If they are forced to stop coverage because they are no longer able to afford the premiums, then that $400,000 death benefit is not going to be around when the service member or veteran wants to leave a legacy.

One last thought: SGLI and VGLI are all connected to and being underwritten in the private marketplace. Most service members and veterans don’t realize that they are paying a contracted private insurer—not the government—and that this private insurer is profiting from them as a middleman.

The Survivor Benefit Plan and VGLI: A Recap

Again, these plans are not really benefits. They are not given to service members and veterans, they are sold to them.

Government insurance packages are financial solutions that are managed by a private company operating in the private marketplace, and the fact is that what these plans offer is not the best deal across the board for everyone; it is only the best deal for those who have no other options. If you are already paying for insurance or plan to, doesn’t it make financial sense to find the best plan that you can that will do the most for your family?

Govt Life Insurance

The problems with the Government life insurance programs

Our Alternative: Your Survivor Liberty Plan

Our alternative to the SBP and VGLI problem gives you both a lot more equity growth (as interest is credited based on the S&P 500 performance, not the federal bond rate) and a lot more liquidity that you can access while you're still alive. It offers a safeguard against negative market returns, and allows you to both comfortably fund your retirement and still be able to leave a legacy behind you when you die.

Although this new, modern approach to privatizing the SBP or pension protection has been available for a few years, few financial experts and professionals are aware of it or its game-changing advantages. The key differences between the Survivor Liberty Plan and what most think are the only other solutions (SBP, term life insurance (SGLI/VGLI), and whole life) are flexibility and control. 

The SBP offers neither. Once enrolled, you pay a fixed cost until you die. Everyone pays the same rate, regardless of your health and age. Assuming the veteran passes away first, the spouse receives a significantly reduced monthly annuity (55% of what the veteran was receiving) until their death. That’s it. There’s nothing beyond that. The veteran’s service is forgotten and there is no legacy. 

With term insurance the problem is actually much worse, even though it’s perceived to be a better option due to its much lower cost. But again, flexibility and control remain elusive. A 30-year term means exactly that. You are now committed to a fixed program that only has an ROI if the insured dies early. What’s worse is the assumption that typically goes along with the purchase of term insurance, which is that the veteran will eventually “insure themselves” via asset growth. There are far too many variables likely to take place within the next 30 years for anyone to have any realistic sense of self-insurance relying on the stock market.

For both SBP and term insurance, the likelihood of sunken cost and no legacy protection are VERY real, yet no one in the government, the financial planning world, or the expert blogging community are focusing on these problems. They don’t recognize the potential of the innovations occurring in the financial industry. Instead, they keep guiding service members, veterans, and their families into traditional and more risky solutions like SBP and term or whole life insurance. This dishonors not only the financial investment that veterans have made in order to provide a survivor benefit, but also the 20+ years of investment (sacrifice) that the veteran and their family gave to this country. 

We believe it is just plain wrong to accept that those 20 years of service won’t be rewarded for a lifetime and beyond, when in the modern age such a solution is both possible and accessible. That’s why we have spent the better part of ten years researching the financial vehicles and creating your Survivor Liberty Plan. Our team members do not have quotas to fill, and we offer these financial vehicles to our clients at substantially less cost than they would pay in “invest the rest” investment fees or for other whole life policies.

Below are some of the reasons why we believe our Survivor Liberty Plan is superior to other life insurance/pension vehicles on the market today.

1. The Survivor Liberty Plan can pay for long term care costs.

Few people think about long term care costs, but failure to plan for long term care can quickly wipe out retirement funds. Not only are people living longer, they are requiring high-cost medical care that didn’t exist just a few decades ago. Costs like assisted living won’t be covered by the VA and Medicare, and there’s no option to leverage the SBP death benefit to help with long term care costs.

The Survivor Liberty Plan offers a long-term care provision that allows a living insured to use a portion of their death benefit to pay for assisted living costs, even if those costs are paid to a close friend or family member. This provision is a game-changing solution that can mitigate the risk of a veteran being forced to liquidate their hard-earned retirement funds to pay for health care costs before they are able to qualify for Medicare. With a Survivor Liberty Plan, the veteran can ensure their own self-care and still have a large probability of leaving a lasting legacy for his/her heirs. 

2. The Survivor Liberty Plan offers a guaranteed return on your investment.

The SBP will cost you up to 6.5% of your pension, a significant amount of money over twenty or thirty years. There is no ROI unless the insured dies, and even then, there is no inheritance available to the heirs.

The Survivor Liberty Plan, on the other hand, offers more equity as well as liquidity that the insured can access while they're still living. And unlike term insurance, the protection never ends. With your Survivor Liberty Plan, you are able to both capture and lock in the growth offered by the securities market without the value of your policy being negatively affected by market corrections. The worst case scenario market rate of return in any circumstances is zero, meaning you get to keep all of your market gains, but you don’t experience market losses; during any downturns you simply experience zero growth on your intact principal.

Furthermore, the benefit doesn’t just get paid to the surviving spouse, nor does your investment evaporate should the spouse predecease the retiree. Your Survivor Liberty Plan can be structured so that it gets paid to the next generation as a legacy.

3. With the Survivor Liberty Plan, you avoid opportunity cost.

There is an opportunity cost for not having that 6.5% of your pension that you are paying for the SBP liquid and invested. Any annuity the SBP will pay, if it is ever paid at all, is considerably less than what might have been generated had those premiums been invested over the long term.

When we first set up your Survivor Liberty Plan, we structure it to start out with the lowest possible death benefit, in order to keep the cost of funding the plan low. In this way, we can turn the 10 to 15 years this type of product would normally take just to break even and bring that timeline down to three to five years, if not immediately. It takes a lot less time for the cash value of the policy to grow at a pace that outstrips inflation and quickly starts keeping pace with things like the S&P 500. The money you are using to fund the plan both keeps pace with inflation and grows in value over time, because it is invested.

4. You don’t have to start a plan from scratch.

If you have already sunk money into an older whole life insurance policy, you can redirect that investment into the Survivor Liberty Plan, along with whatever other contributions you want to provide, using a mechanism called a 1035 exchange.

In the best case scenario, whole life plans usually grow between two and four percent compounded annually, and the death benefits are typically significantly higher than they need to be because they are sold as an alternative to term instead of as a compliment, because the agent makes more money selling a whole life insurance policy. As a result, the cost to insure is also very high, and it takes about 10 to 15 years of regular contributions for an insured person to fully cover the cost of their insurance before they break even and there is any equity that can be accessed.

Moving these funds into a Survivor Liberty Plan using the 1035 provision allows those returns to take effect much earlier. This basically amounts to taking money that you've already put to work for you and giving it a raise.

5. You don’t have to be in perfect health to qualify for the Survivor Liberty Plan.

Some people worry that they won’t qualify for the Survivor Liberty Plan for various reasons: disability rating, tobacco use, flight status, Special Forces, pre-existing health condition, cannabis use, etc.

However, this is simply not the case. Many retiring service members receive disability ratings from the VA for issues that are relatively minor and of no concern at all to life insurance underwriters, so it is worth the time to go through the underwriting process to see whether or not your disability will prevent you from qualifying. With regards to other possible concerns, it is possible to obtain a policy within a variety of situations. When qualifying during the underwriting process, the insurance company is making a determination of how much of a death benefit they should offer you based on the likelihood that they are going to have to pay out this death benefit.

Your physical condition or lifestyle may have an impact on the amount of death benefit you qualify for, but this should not be a show-stopper, because unlike only using a term life insurance policy, in which the only advantage is the death benefit, the Survivor Liberty Plan is about much more than the death benefit; it’s about having a place to protect and grow your money, without risk of loss due to market volatility or taxes.

That said, health qualification is an aspect of establishing a Survivor Liberty Plan. If you think this might be a viable financial solution for you, the sooner you initiate the process, while younger and in good health, the easier the process will be. 

6. You don’t have to have a lot of money to fund the Survivor Liberty Plan.

The Survivor Liberty Plan can be funded with as much or as little as you want to contribute. You can pay for it for as long or as short of a period as you like. You can customize your premiums/contributions and make adjustments to them over time as your life circumstances change.

7. The Survivor Liberty Plan offers litigation risk protection.

Because a permanent life insurance policy is not considered part of an estate tax bill or otherwise considered to be part of an individual’s net worth, it can’t be taken from you to pay for legal damages. In the event that you are involved in a lawsuit that ends badly, whatever other assets might be taken from you, you will retain complete control over and access to your Survivor Liberty Plan.

8. The Survivor Liberty Plan offers liquidity.

There is no liquidity in either the SBP or VGLI unless the insured dies. With the Survivor Liberty Plan, there is liquidity for the retiree and the surviving spouse, and nobody has to die in order to be able to access it. The Survivor Liberty Plan has something called the cash surrender value, which is the amount of fully liquid cash that's available to be taken in distributions without penalties or taxes. As long as a person keeps 10% of that number inside the plan, they can do whatever they want with the other 90%, which is comprised of a combination of contributions and the returns on invested dollars. 

9. The Survivor Liberty Plan offers a tax-free retirement.

The greatest expense most American will ever face in their lifetime is taxes. As more baby boomers retire and less millennials are working, as our national debt rises, it’s not going to be possible for our government to maintain our current low tax rates as they struggle to pay for unfunded liabilities like social security, Medicare, and Medicaid. 401(k) retirement plan distributions are subject to income tax as soon as you begin taking your Required Minimum Distributions at age 70 ½ , and we can expect much higher marginal tax rates within the next decade. This is a risky situation for retirees, who don’t want to have to hand over their hard-earned retirement savings to Uncle Sam.

In the same way that wealthy Americans leveraged the tax-advantages of whole life in the 1980s, modern life insurance leverages IRS code 72(t) to provide the same advantages and with greater flexibility and control, allowing you to access up to 90% of the equity of your Survivor Liberty Plan tax free. 

Is the Survivor Liberty Plan right for you?

The SBP is a one-size-fits-all option for solving a complex problem. It wasn’t designed to address every financial need, and it has definite drawbacks. As with every major life decision, every service member and veteran should reflect on their individual situation (together with their spouses) to determine whether or not the SBP is the best fit for their financial situation. The Survivor Liberty Plan offers an alternative by focusing on the service member’s life rather than their death, including realizing the proper asset valuation of the service member’s military career and the sacrifices made by the spouse and family.

That said, the Survivor Liberty Plan is not for everyone. Depending on your individual, family, health, and financial situations, as well as your vision for your life, the traditional SBP/VGLI or SBP/term insurance strategies may be the best solution for you. But if you want to do anything other than follow the traditional path from military service to 9-to-5 job to retirement; if you and/or your spouse want to devote your post-military lives to a new means of service that involves starting a business or any other kind of lifestyle that will require the availability of funds much sooner than the normal retirement age, then the Survivor Liberty Plan offers both sensible financial protection for the family (tax-free retirement income, long term care protection, legacy for heirs, etc.) and the flexibility, control, and liquidity that will allow you to forge your own path. 

Get the White Paper Now!

If you're sick of getting the cookie-cutter power point slides from the military retirement briefings, then this white paper will blow your mind with new perspective on what is best for YOUR family.

None of this matters if you don’t qualify.

If you are reading this blog post, or if you have clicked over and read our white paper, then you may be contemplating a deep dive into the modern insurance products we are referencing right now, but we urge to hold up before doing that and instead take a very simple first step: reach out to us to see if you qualify. Neither your interest in our solution or your deep dive research into it matters if you don’t know if you even qualify for the plan. This is why we like to put all the information out there for free and share it, because it saves both of us a ton of time. 

If you’re serious about considering this modern, privatized approach to your financial future, then reach out to us and let us know that you are ready to go through the application and underwriting process. If you wait to do this, there is a risk that something could pop up medically or you could be involved in some accident that might change your health circumstances. The ideal time to get qualified for the most amount of insurance is when you're twenty. If you can get $10 million of coverage when you're 20, you should do that. Why not? It's so cheap, and you can pass it off to so many people and have that rating for the rest of your life because once you get qualified, the insurance company can never take that qualification rating away from you. It doesn't hurt. It’s a simple medical exam and an application, and you're done with it.

When the results come back, then you can actually make an informed decision about whether it is something you want to pursue, rather than wasting all your time doing the financial analysis and planning only to find out during the application process that you don’t qualify. 

In order to determine if you qualify, you must go through the underwriting process, and in order to get underwritten, you have to apply. Going through the qualification process DOES NOT commit you to buy the policy. Finding out that you are qualified DOES NOT commit you to buy the policy either.

The sooner you apply—today, while you are young and/or in good health—the better. Once you know for certain that you qualify and that the Survivor Liberty Plan is something you want to consider, then you can take as much time as you need to reflect and discuss your options with us before making a commitment. Reach out to US VetWealth to see if you qualify today. 

Schedule a Discovery Call with a US VetWealth E​​​​xpert Guide!

Scott R. Tucker

About the author

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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