What do spouses need to know about the Survivor Benefit Plan?

Think about what would happen if your spouse’s monthly income suddenly stopped. This is the reality for the spouse of an Air Force retiree who came to me for help recently. Her husband passed away suddenly, and his retirement pay stopped. Now the only income she has is Social Security, which she says isn’t enough income to cover basic living expenses. She told me her husband always said, “The Air Force will take care of you” giving her the mistaken impression that his retirement income would continue after his death.

She came to see me because I assist with benefits for survivors of retirees who die. She wondered why her friend, a widow of a military retiree, was receiving part of her husband’s retirement. She wanted to know why one spouse would get that income while she receives nothing even though she had been married all during the years her husband served in the military. The reason is Survivor Benefit Plan (SBP) protection.

The Survivor Benefit Plan protects a portion of the income a retiree receives and makes it payable to a surviving spouse or eligible children after death. SBP protection is provided for all active duty service members at no cost. If an active duty service member with a spouse and/or children dies, dependents will continue to receive 55 percent of the retirement income he/she would have received. At retirement service members must elect to continue SBP coverage. After retirement the government subsidizes a portion of the cost for SBP protection, but the service member is required to pay a share of the premiums equal to roughly 6.5 percent of the amount protected.

The decision to participate in SBP is made at time of retirement. With so many other decisions being made like where to live and work it is easy to miss the importance of the decision. A service member and spouse who elect not to participate at time of retirement will not have the opportunity to enroll at a later date. If however, the couple participates and later decides that the protection is no longer needed an opportunity to terminate participation is available after the 2nd anniversary of retirement—no refund of premiums paid is given. On the 3rd anniversary of retirement the decision to participate in SBP is irrevocable, and as long as the retiree has an eligible beneficiary he or she will remain enrolled.

In 1986 an important change in the law was put in place to protect spouses and ensure they are actively involved in the decision to participate. Any election other than full coverage now requires written spouse concurrence. This means if a service member wants to reduce the amount of SBP or not participate at all his/her spouse must agree with the decision. If the spouse does not provide written concurrence by the date of retirement the service member will be automatically enrolled.

One of the most common objections to SBP participation is that it is expensive when compared to term life insurance. But consider the following when comparing SBP to term life: If a retiree protects $3,000 with SBP his/her spouse would receive a taxable annuity payment of $1,650 per month. If a widow outlives the retiree by 7 years SBP will have paid $138,600. On average it only takes 2.6 years for a widow receiving the SBP annuity to have recouped all the premiums paid, and SBP will continue to pay until the surviving spouse dies.

Conversely, even if managed well life insurance will eventually run out. If instead of investing in SBP a couple decided to purchase a life insurance policy with a value of $250,000. In order to get the same amount of coverage the spouse would have to deduct $19,800 per year from the proceeds. At that level the life insurance would be completely depleted in 12.5 years.

The SBP annuity is adjusted annually to keep up with the cost of living. This is a feature of SBP that no commercially available investment can match. If you were to protect a base of $2,200 today the monthly annuity would be $1,210, but in 30 years that annuity amount will have grown to $2,407 per month.

Unlike commercial life insurance the premiums for SBP only increase with cost of living adjustments made to retirement pay. Term life insurance premiums will increase as the insured ages. A Veterans Group Life insurance policy with a coverage amount of $400,000 costs $68 per month for a 40-44 year old. That same coverage will have increased to $600 per month at age 65—and it will continue to increase. The SBP plan has a paid-up provision which stipulates that after the retiree makes 360 payments and is at least 70 years of age no additional payments are collected, but the beneficiary is still eligible to receive the annuity.

There are some downsides however. If the spouse of a retiree participating in SBP dies first and he/she does not remarry the money invested in SBP is lost. This is especially important to female retirees because women tend to live longer than men by an average of 5-6 years. There is no inheritance of SBP. After an eligible surviving spouse dies no additional payments are made. So SBP is not the best alternative if a couple is seeking to provide an inheritance to adult children. Additionally, SBP has no cash value unlike whole life insurance policies.

When making the decision to participate consider finances carefully. For spouses who don’t work outside the home examine earning potential compared to financial needs to determine if enough income will be available to live comfortably. Additionally, if a surviving spouse has no retirement income of their own will Social Security be adequate?  Family health history should be factored into the decision. If either the retiring service member or spouse is in poor health or have a family history of short life expectancy it should be considered.

Ultimately the decision to participate in SBP is a personal one that for the majority of retiring members makes good financial sense. Explore your options and talk to your installations SBP counselor to help with the decision. Spouses are encouraged to attend the SBP briefing. Remember the decision essentially rests on the military spouse so ensure you are fully informed before signing anything. The decision you make may impact your future standard of living.