The Survivor Benefit Plan (SBP) is a confusing and polarizing topic. This stems from general confusion about SBP and huge incentives for insurance companies to sell you an annuity or life insurance instead. More importantly, people often make this decision without much thought.
For our family, we spent years thinking about this and researching options. I still had doubts because we don’t know all the information needed to make a “perfect” decision. Nobody does.
However, I think hearing how we arrived at our decision will be helpful to you. There are personal variables that played into this, but those might not apply, so I’ll briefly touch on those later in the article.
What is the Survivor Benefit Plan
The Survivor Benefit Plan (SBP) is a survivorship option for military retirees. In short, you pay a fee (monthly premium), and if you die before your spouse or before your children are grown, they’ll still receive a portion of your pension.
Otherwise, your retired pay stops when you pass away.
Costs for the SBP
For the full benefit amount, you’ll pay 6.5% of your retired pay, and if you pass away before your spouse, they’ll receive 55% of your retired pay. So if you have a $3,000 monthly gross retired pay, you’ll pay $195 per month. If you end up needing to use SBP, your spouse would receive $1,650 per month until they pass.
You can elect to cover a lower percentage of your retired pay if you’d like. You can choose a base amount from $300 to your full retired pay. So, if you only wanted to cover a portion of your retired pay to cover a mortgage or other specific expense, you can.
Benefits of SBP
The main benefit of the SBP is that your spouse continues to receive a portion of your retired pay for the rest of their life. Even better, the inflation adjustment will make sure the relative buying power of their benefit will remain the same. This is a great feature of military retired pay and SBP.
Electing SBP coverage will ensure your spouse always has some income coming in. The only caveat to this is if they get remarried before the age of 55. In that case, SBP payments stop. However, if their new spouse dies or they are divorced, SBP payments can be resumed.
Paid Up at Age 70
One unique, yet often overlooked, feature of the SBP is it’s fully paid up at age 70. As long as you’ve made 360 payments (paid in for 30 years) and are age 70, you are considered fully paid up for SBP coverage and no longer have to pay premiums. But your coverage remains for life.
So, if you retire before age 40 like me, you’ll have to make a few extra payments. I’ll have to make a total of 371 payments before I reach age 70.
This is very important when trying to compare SBP to life insurance products. Most permanent life insurance policies aren’t paid up until you’re 95 or older. In other words, you’ll probably pay premiums for life insurance products until you die or lose coverage completely.
No Medical Exam Needed
Another overlooked feature of the Survivor Benefit Plan is that you don’t need a medical exam. Your service qualifies you for the program. As long as you make the election and pay the premiums, you’re covered.
This can be especially helpful for anyone with preexisting medical conditions or negative family history. Those might make other options too costly.
The Cons of SBP
The biggest con to SBP is it costs money for coverage. We all like getting things cheap or free, but this is a paid benefit. The government supplements the program to keep costs reasonable and ensure it continues to pay as promised.
However, for us, this isn’t a huge cost. More on this later, but I anticipate this being an even smaller problem later in life.
Permanence of the SBP Decision
For me, one of the biggest dings to SBP is having to make a (mostly) irrevocable, lifelong decision. Although you can opt out 2 years after you retire, or if you meet specific criteria for eligible VA Disability compensation.
Even though I was very prepared for this decision, I still felt nervous about it. You just can’t know the right answer until after you’re dead. That sucks.
How We Made the Decision for SBP
When looking at the decision to elect SBP or not, we focused on three main factors:
- What coverage do we need, if any?
- What are alternative options?
- What will life be like if I die early?
By following this methodology, we were able to zero in on what the right thing was for our family.
Begin With What SBP Needs to Cover
From the beginning, I’ve wanted my pension from the Army to cover our basic living expenses. I’ve heard this described as a minimum dignity floor. I’ve also heard people describe this as your “HUG” expenses: House, Utilities, and Groceries.
Covering Our “HUG” Expenses
Currently, my retired pay won’t actually cover our “HUG” expenses anymore. The insane amount of inflation over the last 5 years really changes things for us. Mortgage rates, vehicles, groceries, and just existing in general have felt way more expensive.
The cost of housing alone has gone up significantly in the last five years. (see chart below)
When we first started planning my exit from the military, my anticipated pension would have covered a mortgage on a solid house, utilities, and maybe half our grocery bill. Now, we’ll be lucky if it covers a mortgage.
Other Assets at Our Disposal
Luckily, we’ve got adequate life insurance coverage (outside of SGLI) with a term policy that runs until I’m age 53. We also have a significant amount of retirement assets already. So, we really just need to keep things running for my wife and son until she can access retirement accounts penalty-free.
The life insurance would pay off the house or buy a house, so then my wife just needs to cover utilities and groceries. This is what the SBP would cover until my wife is ready to retire and beyond.
Researching Alternatives
I want to be clear, I’m not here to compare SBP to any other product or asset because it simply doesn’t have an exact equivalent. Therefore, comparisons are futile. I believe the only thing you need to measure SBP with is the actual insurable need.
But there are other ways to cover the actual needs my family has. I’ll touch on those briefly.
Life Insurance Products
The most common way to insure against my untimely demise is life insurance. However, we already have some life insurance. I’ll talk more about why this wouldn’t be a great option for our situation later. However, it might be the only thing your family needs.
Term Insurance
Term life insurance is coverage that lasts only for the term specified. You pay a monthly premium, and if you pass away during that term, your beneficiaries will receive the agreed death benefit. For reference, SGLI and VGLI are forms of term insurance.
Permanent Insurance
The term permanent insurance encompasses pretty much all other types of life insurance. There are a wide variety of policies such as whole life, universal life, and variable life. There are all kinds of variants of these as well, such as Indexed Universal Life (IUL) policies.
Permanent insurance typically has a cash value portion of the policy, which can be invested within the policy. Most policies are not fully paid up until age 95 or older. I’ve seen many recently that run until age 105. In other words, the premiums you pay are also permanent.
Annuities
Annuities are the closest to how the SBP works. An annuity is an insurance product to insure against living too long – not dying too early. Annuities also come in a variety of types, and each contract is unique. The most common types are immediate annuities (pay now, income now) and deferred annuities (pay now, income later).
An annuity will generally pay you for your life based on different crediting and premium factors. You can also elect joint coverage for an annuity. Some annuity options work similarly, but there are no annuities that I know of that start at your death and adjust for inflation.
For the annuities I considered, they were still expensive compared to SBP. If I were going to use an annuity, I’d probably go with a combination of term life insurance and then have my wife purchase a single premium immediate annuity (SPIA). But this is a big decision she’d have to make right after one of the most stressful times in her life. Without something already in place or someone knowledgeable to turn to, it could be too much stress or just never get done.
How the SBP Compares (Severely Simplified)
The SBP functions similarly to term insurance, paid as an annuity. However, it’s a permanent benefit paid up at age 70 (and 360 payments), and gets an annual adjustment for inflation. It’s still different. It’s also not insurance and has its very own set of rules.
The SBP doesn’t have an exact equivalent and is the only program to continue paying your retired pay after death. The combination of insurance acrobatics needed to replace coverage of the SBP fully would be very complex and expensive.
Bringing Everything Together for Our SBP Decision
To make our decision, we did our research and had lots of conversations. I also talked with many friends and mentors in the military personal finance community. Overall, I felt very prepared for our decision, but we can’t know what the right choice is until I’m already dead.
Family History
Autoimmune disease runs in my family. My mom passed away at age 55 from complications of Scleroderma and other related diseases. My dad has Rheumatoid arthritis. I’m healthy, but you just never know what will happen.
I don’t feel comfortable knowing there’s a chance my wife would have to live without me. She’s very money-avoidant, so dealing with money decisions causes her a lot of stress. I want to leave behind great memories and stability, not chaos and confusion.
No Exact Equivalent
There is no real equivalent product to SBP (yes, this is worth repeating). It’s essentially an inflation-adjusted annuity that’s fully paid up at age 70. It’s also a benefit I can’t get later. This will be a great addition to the life insurance coverage we already have.
It also gives me peace of mind knowing that even if my wife does remarry, she’s got this to fall back on. If she remarries and that doesn’t work out, or her new (less awesome) spouse passes away, she will always be able to turn SBP back on. It’s also a benefit that some sweetheart scam can’t take from her.
How My Wife Would Actually Use the Money
My wife is much more likely to spend a steady check versus a big lump sum of money. She still likes to keep extra cash in envelopes in the gun safe and savings accounts. She also stresses when she needs to pull money out of savings – even if that’s literally what we were saving it for.
One day, I asked her point-blank, “If you got a million dollars from me dying, would you spend it?” She thought about it for a minute. She said she would spend the money only if she or my son really needed it.
That was a big deciding factor to have some type of annuitized payment for her. It does no good for her to get a big chunk of money if she’s not willing to use it. However, she’s very comfortable with using it to buy a house outright or pay off the mortgage, so keeping enough to buy a house in term coverage is still a good fit.
Final Factors and Our SBP Decision
One of the other things to consider was the cost over time and the percentage of our income and wealth going into the SBP. If you’ve read my article on my “financial offramp” to retirement, you’ll know I’m a fan of having multiple streams of income.
I wanted my wife to always have some guaranteed income. With the SBP payments, investments, and eventual Social Security benefits, it makes sense for us to use SBP.
Smaller Percentage of Overall Income Over Time
Although the SBP costs 6.5% of my retired pay, I project that it’ll be a much smaller percentage of our overall income. And my estimated premiums over time will be an insignificant amount compared to our projected wealth at retirement.
I look at it like another asset in our financial life. We might never need it, but I only have to make my exit a couple of years earlier than my wife to make it worth the costs. If it’s never used, we’re not going to be harmed either.
The Final Decision
In the end, we decided to go with full coverage. I’d considered doing partial coverage or using term policies instead, but decided not to. The one benefit of the SBP that I didn’t mention earlier is the simplicity and guaranteed nature of the SBP.
Overall, I think it’s a unique benefit that’s worth the costs for our family. It’s simple and guaranteed for life.
Other Resources to Help You in Your Decision
I’ve had countless conversations about the Survivor Benefit Plan with several financial planners from MFAA and fellow money nerds at MilMoneyCon. I read Forrest Baumhover’s book on SBP. I’ve also read articles on the DFAS site, military pay and compensation site, and many articles like Kate Horrell’s blog posts (highly recommended). I also had my wife sit through a presentation from Navy Mutual. If you email Navy Mutal, they’ll even do one-on-one counseling for you and your spouse.
Bottom line, start thinking about SBP early, and have these conversations with your spouse long before you retire. You’re probably not going to get a class on this during TAP, and many insurance salespeople will try to convince you that SBP is expensive or unnecessary (they earn a commission for each policy they sell).
You have to arm yourself with information well in advance. And if you know you’ve prepared and still feel nervous about it, you’re not alone. I’m very knowledgeable in personal finance and SBP, and I still had hesitation. It’s a big decision and you’re not alone!