Deciding whether to take the Survivor Benefit Plan (SBP) is one of the most important decisions military families make when it is time to transition to civilian life. Unfortunately, it is also one of the most complex. There are many facts to know and things to consider when analyzing the options. Understanding SBP is essential to making the best decision for the family.
SBP provides a life annuity to a survivor or survivors. In this situation, the military retiree’s pension is a life annuity – the retiree will receive it for as long as he or she is alive. By purchasing SBP, part of the annuity (pension) can be transferred upon death to a survivor (beneficiary). Thus, the survivor now has a life annuity – pension income for life.
If SBP was free, then it would make sense for everyone to take it. It isn’t free, though. You must buy it. Military families in transition must decide if it provides enough value to justify purchasing it. Below are seven things we think you should know about SBP to help you make your decision.
1. It’s a great solution to a financial problem, just not EVERY financial problem. Not everyone retiring from military service needs a life annuity for a survivor. Some people will retire from military service and not be financially dependent on their pension. Some will. Some will have a short period of dependence, but then grow independent of it later. We believe there is generally good value in SBP, but if you are able to meet your needs with a less expensive product (like a term life insurance policy), you should take the less expensive product. When analyzing your need for SBP you should assess such factors as:
- Ages of you and your spouse
- Children with special needs
- Family assets
- Spouse’s income (or potential for income)
2. The ‘Break Even’ point. The nightmare scenario for SBP is that the retiree pays for SBP for 30 years and the day after the final payment is made the survivor falls over dead and never collects a dime of survivor benefits. This thought leads many people to ask, “What is the break even point?” How long does my survivor need to collect benefits to get back all the money paid in premiums? Because this is such a common question I will answer it, but let me first state this: It’s not the right question. It is NOT information you need to decide whether to purchase SBP. Did you calculate how many collisions you’d need to have to ‘break even’ before you purchased auto insurance? You did not, because that wasn’t the real issue!
The answer to the breakeven question is 42 months. That’s ignoring inflation adjustments. If you paid for SBP for the full 30 years of premiums (at 6.5%), your survivor would need to collect 55% of your base amount for 42 months to get all your premiums back. If you are considering a variation of SBP that changes the survivor or the base amount you may get different results. (But you’re still asking the wrong question!)
3. You can elect coverage for a Spouse, a Spouse & Children, or just children. Most families will find that SBP is not a good solution for survivors other than the spouse, but some will. Perhaps there is a child with special needs who will rely on that pension income long after the retiree has passed. In that case you can elect to cover the spouse and the children, or even just the children. One thing you cannot do, however, is provide coverage for a spouse and children that aren’t also the covered spouse’s children. You can’t, for example, elect coverage for the children of your first marriage and your second spouse.
4. Not all premium rates are the same. Most active duty military retirees who elect SBP coverage will pay 6.5% of their ‘base amount’ for 30 years. The base amount is the amount you elect to have covered by SBP. This can range from the minimum base of $300/month to the full amount of the pension. If your base amount is less than $635 per month the rate is 2.5% of the base amount. If the base amount is between $635 and $1,360 the rate is ($15.88 + 10% of the amount over $635). If you elect coverage for survivors (beneficiaries) other than just the spouse, the rate changes. If you are a reservist there are even more rates and variables! This can get confusing. Fortunately, the Army has a decent SBP premium calculator at their website linked here.
5. SBP Premiums are tax free. SBP premiums are deducted from your retirement paycheck pre-tax. If you elect full coverage of your pension you will only be paying tax on 93.5% of your retired pay during the time you are paying the SBP premiums. While this is probably not the issue that determines whether SBP is right for you, it’s good to know!
6. SBP Benefits are taxable. SBP has many characteristics of life insurance, but it also differs from life insurance in several key ways. This is one of them. Life insurance death benefits are not taxable. SBP benefits are taxable. Make sure you keep this in mind when you are making your long term plan.
7. Reservists should ALWAYS elect SBP when they meet initial eligibility. Remember when I said if SBP was free everyone should get it? Well, that’s essentially the case for a period of time with reservists. At the time you qualify for retired pay through a non-regular retirement you become eligible for SBP. Take it, because you don’t actually start to pay for it until you start collecting retirement pay. That means you have free SBP coverage for your family from the time you leave the service until you start collecting your retirement pay. If something happens to you prior to collecting your retired pay, your family still collects 55% of your pension without ever paying SBP premiums. At the time you start collecting retired pay you have the option to change your election and refuse the SBP coverage.
We had a client who exited the reserves and opted out of SBP at that time. This happened before he was our client and he didn’t understand his options when he made the choice. He didn’t know he would have another opportunity to opt out later when he reached retirement age. A few years later, before his retired pay started, he was diagnosed with stage 4 cancer. He was not expected to live until retirement age when he could opt back into the SBP. We watched his gruesome race against death in helpless terror. Fortunately for his wife he was tougher than his doctors thought. He didn’t succumb until two months after reaching retirement age and reinstating his widow’s right to SBP coverage.
We don’t ever want to be in that situation again. If you don’t understand your SBP options, schedule a free consultation with us to discuss it. We have your back. (757) 752-8055