Career Military families are often faced with tough decisions about how to invest their military pay, but one that is not always on the radar of military service members and their spouses is the Survivor Benefit Plan (SBP).
Considering the limited additional income streams available to most military families this aspect of military life will have a bigger impact on your gross retired pay than serving a few years beyond 20. Many financial planners have never heard about dependency and indemnity compensation or social security benefits through veterans affairs.
If you dig a little deeper after you attend the retirement pay briefing you'll find some examples online about the SBP election, but that's about it. It is vaguely mentioned on financial planning websites trying to sell you a whole life insurance policy if at all.
This is a program where the military will continue to send an annuity check to your beneficiary each month if you pass away while on active duty or while collecting your military retirement pay.
But what no one talks about in retirement briefings, in Facebook groups, or on military finance blogs is what happens if you don't die young? Because that is what is most likely to happen. And the answer is that it can be extremely costly.
We write about that in a previous article about the costs of SBP benefits and the opportunity cost of not investing in an alternative strategy.
In this article, we will look at the pros and cons of military survivor benefits that will help you ensure you are confident in whatever choice you make.
Understanding the Military Survivor Benefit Plan
The SBP was created to provide a survivor annuity for dependents of retired or deceased military retirees. It also provides an increased annuity for survivors if the member dies while still in service. Once implemented the SBP benefits cannot be revoked without spousal consent and must be signed up before the retirement date and there is no opportunity to change coverage once benefits have begun. If you select this plan, your monthly payment amount will be reduced to pay for it.
How does the survivor benefit plan work?
SBP is a program that provides monthly payments to help provide income for military families in the event of a service member’s death, regardless of cause. This insurance-type benefit does not require premiums but instead is funded as a government program while on active duty.
However, to maintain the program in retirement after military service there is a cost deduction from the monthly pension payment amount. The SBP coverage is automatically applied to retired pay unless the plan is deliberately canceled by the service member and spouse together.
In the event of the retiree's death, the SBP payment amount to the surviving spouse increases with inflation each year and is paid by direct deposit to the survivor’s bank account. Should the spouse remarry before age 55, the SBP ends.
Evaluating SBP Considerations: SBP Pros and Cons
At the core, the Survivor Benefits Program provides peace of mind with guaranteed monthly income as long as it fits the beneficiary's cost of living and lifestyle. But, service members should consider some of the pros and cons before enrolling in the program.
Automatic Enrollment in SBP for Military Retirees
SBP enrollment is automatic if you are married when retired, but can be less than optimal depending on several variables. As usual, the decision has points in favor and against it.
Situations where SBP may be ineffective
Dual career service members and multi-income families. Service members that are married to another service member, or have a spouse that works outside the home. Diversification of income allows military families the flexibility to avoid paying for SBP costs when they can reinvest that money elsewhere.
Also, a significant age gap or health difficulty in an assigned SBP beneficiary will make it less likely a benefit would be received.
Conditions when the SBP is appropriate
The service member has developed a serve medical condition before retiring from the military. Regardless of whether or not the VA disability rating is 100%. Health factors such as cancer, heart disease, and mental health can make SBP a better choice financially than a private life insurance policy.
Regardless, the SBP DIC offset is rarely enough to create financial independence for the surviving family of a military member.
Eligible Beneficiaries of SBP
SBP payments may not cover all desired beneficiaries should the Veteran want to leave the pension as a legacy. For the most part, it is designed for military spouses who outlive their military members but wouldn't take effect until much later in life after both have been fully retired for some time. In this case, child coverage is rarely the priority over spouse coverage.
For example, if a Veteran is survived by a spouse and children only. The SBP would pay benefits for the child until adulthood and to the spouse for a lifetime. Other than the complications of transferring benefits due to divorce or remarriage, there aren't other options to change who could receive the SBP benefit.
Once there are no available beneficiaries, all premiums paid into the SBP become lost.
SBP Terms – Cost & Payout to Beneficiaries
One of the most surprising aspects about attending one's first retirement briefing is that it isn't free.
For 30 years, career military retirees who join the SBP will pay premiums for the death annuity component of the plan. There are restrictions on when and what happens if the SBP does not kick in. There is no assurance of a return on investment.
Survivor Benefit Plan Example – Cost & Payout
For easy math, let's say your retirement pay is $10,000 a month (about what a retiring one-star makes). At a fixed cost of 6.5% that is $650 per month, or $7800 per year.
If the veteran dies before the spouse a 55% payout would be $5500 per month.
Now, what is most likely to happen is that the veteran will predecease the spouse and a benefit will be paid in some amount. Given the likelihood that the retiree will probably live the 30 years required to pay into SBP that's $234,000 in SBP premiums alone, NOT including inflation and COLA adjustments.
In this case, even if the veteran dies before the spouse, it would be almost five years before the benefit payments outweighed the cost. Either way, once both spouses are deceased, no further benefit or legacy will be paid.
This scenario is the best case situation for SBP to work in your favor even if your health conditions disqualify you from private life insurance.
But what does the DOD office of the actuary have to say about the probability this will occur?
The cost-benefit analysis of Survivor Benefit Plan (SBP) for military members and their families
Find those who don't participate in SBP, ask them, why not?
Some people opt out because they believe they can put more money to use elsewhere; others choose not to participate because they want to leave it for their children.
Others realize that 55% of the pension paid to the surviving spouse every month isn't that much money.
Given the amount required to pay for only a possibility of a benefit with no guarantees make this analysis easier than most realize.
The SBP Decision
We just need to answer the question, "what is the probability that I or a member of my family will receive a benefit from my investment of 6.5% of my pension into the survivor benefit plan?"
If you are satisfied with your answer to that question, then you can be sure you'll be satisfied with whatever decision you make. Because the important thing to know is that once you decide to reduce your retirement pay for SBP, there is little recourse in the future.
Calculate the SBP Coverage Probability
The first question I always get from retiring military is this:
"Scott, is the Survivor Benefit Plan worth it? I've done all the calculations about the cost of SBP, and it seems like a raw deal. But how do I know for sure?"
Like any risk-management decision you might ask a financial advisor, it's a good idea to start with the probability of a given event occurring and the opportunity cost of potential gains elsewhere due to whatever resources were needed to offset the risk.
This is what is happening with the SBP annuity. You would be required to deduct a significant portion of your lifetime military retirement pay that could otherwise be used or invested elsewhere.
The reality is this. There is never a 100% chance of a return on investment with SBP. For most retiring veterans and spouses the probability quickly drops to below 50%. This means that you would have no idea if you were to get a return on your investment at all.
Most likely, you'll discover that even if you're relatively healthy then you can do better on the free market.
Want to find out for sure?
That's why we created this series of videos, the Military Retiree Pay & SBP guide, several webinars, and podcasts.
If you want to calculate your probability of that SBP makes sense without having to talk to a financial planner you can either contact us and we'll walk through it with you together or you can visit the DOD department of the Actuary and download the calculators.
Is The SBP Safety Net Worth the Premium Cost?
There are pros and cons to any financial or life insurance program, including the survivor benefit plan. At first glance, many Veterans believe that there is a decent probability of dying before the spouse.
While this may be true on average it is not always the case. The probability of dying before your spouse is dependent on how long you expect to live--which is quite difficult for most people to predict.
The greater likelihood is that both spouses live until their respective life expectancies and never see any significant benefit from the thirty years of costly SBP coverage.
When you invest in an individual Life Insurance program instead of the Survivor Benefit Plan (SBP) you can design it to fit your needs. You are now able to create multiple opportunities for positive outcomes without requiring someone to die before there is an option for a return on investment.
A logical assumption to make in the world of finance and investing is that you would hope to get some return on investment without having to die!
The ONLY way that any benefit gets paid from the survivor benefit plan is when the retired service member dies.
We just can't justify how that is a good investment recommendation if someone is otherwise healthy and could qualify for a private contract with a well-established and highly rated insurance carrier.
The only "benefit' is that you can avoid underwriting, which isn't useful for someone who just passed a health exam to get into the US Military!
Any claim the SBP is subsidized and therefore a benefit is a weak argument typically made by those whose paychecks are subsidized as well.
Subsidized by the taxpayers, not the Government.
Nothing is free folks.
Quick side note: The Gov't outsources federal group insurance programs like SGLI, VGLI, and FEGLI to private insurance carriers anyways. Did you know that the premiums deducted from your paychecks are paying for this?
When A Term Life Insurance Policy Makes More Sense Than SBP
While the Survivor Benefit Plan (SBP) is better than no benefit options at all, there are times when it's better to opt out. If you choose not to participate in SBP and instead invest your savings elsewhere, you would then likely be told by a financial expert or counselor that you need to buy term insurance to cover the death benefit instead of SBP and that it would be cheaper.
This is not exactly misleading, but it's not exactly true either. Which is not helpful to solve the real problems we've identified earlier in this article.
SBP is a benefit that provides for spouses or children of military members to receive a monthly payment from the government after the military retiree passes. The program was put in place to help offset a spouse's loss of income.
Term life insurance, on the other hand, is a contract between you and an insurance company that provides coverage for a specified amount of time (the term).
A term life insurance policy can never replace the SBP because by definition the term will end. But the cost-benefit analysis may make sense if you prefer more control over your income and assets. Term life insurance has more flexibility because you can potentially qualify for a low-cost policy.
With the modern term insurance policy we have access to at US VetWealth we can create low-cost term plans to start that also give you the option to extend at a later date. Or you can convert to a permanent policy for a tax-advantaged wealth management program.
We discuss why a whole life insurance policy also isn't the answer in another article you can read here.
Is There a Better Survivor Benefit Plan Alternative?
A Life Insurance Program for Career Military Service Members
We often hear that only 1% of the population serves in the armed forces. Then how many serve a full career and retire with benefits? Not that many compared to the full population.
Then why is this part of the population, with very unique financial benefits, typically given institutionalized personal finance advice that may not be in their best interest given the huge life-changing event they face? Leaving a career in the military with the daunting task of finding a completely new source of income and lifestyle.
The US VetWealth Military Pension Protection System is The Better Way
We take these decisions seriously because we know what it feels like to make a mistake on the topic of SBP, life insurance, the future, and sadly, death.
One of our co-founders lost her father at sea while serving in the Pacific when she was only 10 years old. The active-duty death benefits soon ran out and while her mother received SBP payments, her family struggled financially for years after her father's death.
While we argue that from a financial perspective, the most likely scenario is that everyone will live to life expectancy and we should prepare mostly for that. We also understand how assuming the SBP payments would be enough can backfire in the unlikely scenario there is an early demise.
This is why we have a different approach to replacing SBP coverage with an upgrade to what standard financial planning recommends.
We Use Defense and Offense
What makes our approach so different is that we incorporate an offensive approach to using more life insurance instead of the defense-only approach to protecting your military retired pay.
Look at it this way.
On the defensive side of things, we help you calculate what your full military pension is worth. This is the value of your benefits as a military retiree. That determines your insurable interest and how we calculate the pension you can leave as a new legacy.
If you were to pay SBP premiums for 30 years as a deduction from your military pension, what would that add up to? This determines the investment commitment that we use for living return on investment.
You can visit our webpage where we review how to complete an SBP replacement analysis and design in a series of videos. We outline this approach in more detail.
What you can expect with our SBP Analysis
For all of our clients, we begin with free no-obligation consultations to ensure that you understand the materials you've reviewed from our books, videos, and website. This is a better method to address the emotional aspect of ensuring an eligible survivor has the cash flow in a financial plan in the unlikely event a primary income-earning spouse dies.
How to Decide If The Survivor Benefit Plan Is Worth It
Here's How to Find Out:
- Complete a Survivor Benefit Plan Analysis Call
- Apply for Qualification
- Redirect Future benefits payments to fund
Get Started With a FREE SBP Analysis
You know that you want to do all you can for your spouse and family, but sometimes the right decision isn’t clear. It’s not easy to balance financial security with making sure your loved ones are taken care of in the event something happens to you. The Survivor Benefit Plan (SBP) is a great resource if it makes sense for your situation, but have you considered other options?
If you are a high-income earner with a large pension and not enough life insurance, it's time to learn about the US VetWealth Spouse Benefit Plan.
At US VetWealth we provide military survivor benefit plan pros and cons so our clients can make an informed decision about what type of defense they need against offense - life insurance death benefits or SBP coverage.
We also offer a free Military Survivor Benefit Plan analysis where we take a closer look at how this program would work out for your family.
It's important to find the right solution for your needs and we're here to help. We use defense and offense when it comes to planning - taking care of your family in both life and death. With our analysis, you'll know if Military Survivor Benefit Plan is worth it or not.