One of the biggest choices retiring service members face is whether to take the Survivor Benefit Annuity or not. Unfortunately, it’s also a topic that many of us don’t even think about until it comes time for us to make the decision. There is no easy, cookie cutter answer for who should, or should not, sign up for the Survivor Benefit Plan; but there are several items to weigh when making the decision – and I will touch on many of them in the below paragraphs.
What is Survivor Benefit Plan?
First – what is the Survivor Benefit Plan (SBP), what does it do? SBP is an annuity – it will provide a surviving beneficiary with a fixed income stream. Beneficiaries can be a spouse (same-sex marriages are recognized); former spouse; children; or a natural interest person (individual like a brother, sister or child beyond eligibility for child coverage). If you do not have any beneficiaries you can choose not to take coverage at retirement, but let your personnel office know you do not have any beneficiaries. Each beneficiary has its own guidelines, and if you choose not to elect your spouse his/her notarized signature will be required. Children with a disability which existed before their 18th birthday, or which was incurred before age 22 while child was pursuing a full-time course of study are eligible for their entire lives.
Annuities cost money – you are paying into an account with an insurance company, who will pay a defined benefit to your family when you die. In most cases the cost is capped at 6.5% of the elected level of coverage (natural interest person cost can be up to 10% of gross pay). The benefit received can be up to 55% of a retiree’s pension. Please note – Active Duty service members are covered as well, but they don’t have to pay into it. Should an Active Duty member die while on active duty, their beneficiary may be eligible for up to 55% of their base pay (does not include allowances for housing or food, or any additional pays).
Let’s review an example: a retiree’s pension is $3,000 (pre-tax) each month. They want to provide their spouse with the maximum benefit, 55% ($1,650/mth). In order to provide their spouse with $1,650/mth until the spouse passes $195/mth will be deducted from their pension (pre-tax) until the retiree turns 70. So one consideration if you want your spouse to receive income after your gone is: “how much insurance do I need to provide the same benefit for x number of years, and how much will that cost?”
Insurance vs. SBP
For some people, SBP may not make sense – if they live to be 80 and their spouse passes away at 84, they lose out. On the other hand, if they pass away at 40, and their spouse lives to be 84, that income could be a significant help – especially with young children. In my opinion it’s a no-brainer if, and only if, a family has a child with Special Needs. The child in most cases will outlive both parents, the benefit received will not be affected by Social Security; and now that you can make a Special Needs Trust the beneficiary SBP will not affect SSI. The decision to own any additional life insurance can then be made.
There are a couple advantages of insurance vs SBP. It can cost a lot less for the same benefit. If you cancel an insurance policy, as long as you are still insurable you can get another one later in life. You can control how to receive the benefit – lump sum, annuity, etc…
On the flip side of the coin, there are benefits of SBP over insurance. You do not have to be underwritten (you cannot be denied coverage) and its cost is not age based. SBP premiums come out pre-tax, lowering your taxable income. It can come out of your pension – so you never “feel” it. There’s no risk of missing a payment and having it cancelled. There is a cost of living adjustment, it keeps up with inflation.
At the end of the day what matters is what do YOU and your spouse want to do? Is it important to leave an income stream behind when you die? Very few of us know what our expiration date is, and this is another hedge in our favor. This is a conversation I think families should have throughout their military careers; not put on a shelf until retirement. Do your due diligence, what will it provide – and at what cost? What has more impact – the loss of $200 – $300/mth in retirement; or the loss of $1,500 – $2,500/mth for your spouse and children when you die?