Survivor Benefit Plan

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(Thanks again to Tomcat98 for backing up my research with impressive actuarial data!)

This “simple little SBP summary” mutated into a two-part description. Today we’ll cover SBP for active-duty retirees and in the next post we’ll cover the Reserve Component SBP.

The SBP will cost you up to 6.5% of your pension, so it’s a significant effect on your retirement budget and on the amount of savings needed to reach financial independence. The SBP decision has to analyze (1) whether it’s necessary and (2) what level of support to provide for your survivors.

This post will only give a broad overview of the SBP and its requirements.  The program started in 1972 and its eligibility criteria are now full of caveats, special situations, and unusual circumstances. If your specific question isn’t covered here then you (and your survivors) may still be legally eligible to buy the coverage.  Start your research with the links in this post and then contact the Defense Finance and Accounting Service (DFAS) to discuss the details of your situation. Even after talking to DFAS you may wish to review the SBP legislation with a lawyer to determine whether your eligibility has been affected by recent court rulings.

The SBP is a one-time decision that has to be made at retirement, or within a year of a change in your situation (like remarriage or parenthood). If you retire with a spouse then it’s not even your decision! By law, your spouse and children are automatically enrolled at full coverage (which costs 6.5% of your pension) unless your spouse elects a lower amount or declines coverage. It’s their choice.

If you buy SBP coverage and later change your mind, then during your third year of retirement you can cancel your coverage (no refunds). After that you generally can’t change your decision unless your situation changes, usually through divorce or spouse’s death. If you’re married or a parent at retirement and they elected not to have you buy SBP coverage then that decision can’t be changed either, even if you later remarry or have more kids. The only widespread exception would be if Congress passes a law to allow a “second chance” of open enrollment. It’s happened just four times in the last 39 years.

The SBP is generally only available to veterans who have retired from active duty or from the Reserves/National Guard. It’s a retirement program, so it’s not for veterans who have separated before retirement eligibility. SBP offers special provisions for Reserve/National Guard who have filed for retirement but are not yet drawing their pension, and we’ll cover those in the next post.

Your SBP premium buys a life insurance policy that’s paid as a survivor’s annuity with a cost-of-living adjustment (COLA).  While you’re alive, the premiums are deducted from your pension. The cost of insuring your spouse is up to 6.5% of your pension (before taxes) and children’s premiums are a fraction of a percent (based on their ages). When you die, the “full coverage” option pays 55% of your pension to your survivor(s). Lower coverage can be elected by your spouse (which means a lower monthly premium). Once you reach age 70 and have made 360 monthly premium payments, the SBP coverage is considered “paid up” and no further premiums are deducted.

The SBP is the world’s cheapest survivor COLA annuity, and it’s backed by federal law. Congress pays about 40% of the program costs and the rest is covered by the SBP premiums. If your spouse wants the coverage, or if you want to insure someone else who qualifies as an “insurable interest”, then this is the best combination of affordable and trustworthy insurance. No commercial insurance policy can compete. However your first question should still be whether you want to buy this insurance, and then your second question is how much. Only about 75% of active duty retirees enroll in the SBP, although it’s much more likely that women will outlive their male spouses.

Regardless of the cost, do your survivors really need the SBP? If you retire while you’re unmarried and childless then you probably don’t need the SBP– you have no survivors. (Divorcees are a different situation, and you may decide to elect SBP as part of a divorce decree.) If you later get married or become a parent then you could start SBP coverage within a year of that event. You could also elect SBP coverage for someone with an “insurable interest”, such as a close relative or a business partner.

Instead of the SBP, you could try to self-insure your survivors. If you plan to leave your spouse enough assets after your death, or if your spouse expects to receive their own pension benefits, then they may elect to decline SBP. When my spouse and I both retired from the military, we both declined each other’s SBP. (She doesn’t carry comprehensive auto insurance on the beat-up old clunker in our garage, either, and she says it costs a lot less to operate & repair.) If I die before her Reserve pension starts, my pension stops but she’ll still have enough assets to bridge the gap.

If you or your spouse still aren’t sure whether to buy SBP coverage, then analyze the benefits to assess their value. Although “full coverage” provides 55% of your pension to your surviving spouse and minor children, beneficiaries can elect to receive less than full coverage. The premium is paid from your pension before taxes, so SBP cost is even lower than comparable life insurance or survivor annuities bought with after-tax dollars. Finally, SBP payments receive the same COLA as military pensions. (Which admittedly has been zero lately, but COLA annuities from civilian insurers are much more expensive.) There does not appear to be a survivor’s COLA annuity that can even compete for the same price as the SBP. If there is one, regulators would be skeptical of the company’s ability to pay the claims.

Is SBP worth the expense? Well, how much would your spouse need if you died? Is it worth giving up 6.5% spending today for assurance that they’ll have at least 55% of your income after you’re gone?

The first step is to forecast your survivor’s budget. Some expenses may not change (the mortgage or the rent) while others will go down (not needing a second car, buying fewer groceries). Your activities and hobbies that you don’t share with your spouse would also drop out of the budget. Include Social Security in your planning, because your spouse will be able to collect it on your earnings record or on their own.

Another approach would be to insure your survivors against large expenses such as a mortgage. Maybe your survivor’s budget doesn’t need your pension if they don’t have to pay the mortgage. Instead of paying 30+ years of SBP premiums, you could accelerate the payoff of the mortgage (before you retire) or buy term insurance (or, um, mortgage insurance) during retirement until the mortgage is paid off.

Once you forecast your survivor’s spending then you can decide how much of your pension they really need. Instead of collecting 55% of your pension, your survivors might only need 40% or even 20%. Maybe they just need a large lump sum to pay off a mortgage or to bridge their expenses until they can collect Social Security. Lower SBP coverage would give you and your spouse more pension money now to enjoy together during your retirement. Again, it’s the spouse’s choice.

Every major financial decision has both an analytical part and an emotional part. When you do the math you may not be able to quantify all the factors, and probabilities are notorious for failing to go your way when you most “need” them to. The issue with the emotional part of the decision is that even if the numbers do add up, any emotional conflict can cause an investor to fail to follow through or to “sell out” at the worst possible time. While your analysis could conclude that the SBP numbers don’t add up for your marital/parenting situation, it still might not “feel” like the right decision.

So run the numbers, but consider your spouse’s feelings. Even when it’s not economically cost-effective, insurance brings confidence during disastrous situations. Your spouse could elect for the full amount and pay 6.5% of your pension to ensure everyone’s peace of mind. It’s their choice anyway.

It’s like the credit-card commercial:
Doing the math– time-consuming but reassuring.
Domestic harmony– priceless.

Two other aspects of SBP apply to Reserve and National Guard members. We’ll cover those in the next post.

Related articles:
Retiring on multiple streams of income
Military retirement: how much can I really spend?
Military retirement spending: how much will I need?

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WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

23 Comments
  1. Reply
    JOHN A. THIEL March 13, 2017 at 11:49 PM

    The court ordered that I retain the SBP benefit for my now ex wife, its been 5 years since the divorce! She nor I submitted the deemed essential document a year after the dovorce, It says She “mus” but doesnt say what happens if she dont!! She also never submitted the documents for the 27% of my retirement to DFAS.. to get her portion. its been 5 years and I still pay her a personal check..

    • Reply
      Doug Nordman March 16, 2017 at 11:56 AM

      John, if you didn’t sign up your ex-spouse for the SBP then you might never be able to do so. The SBP occasionally allows open enrollments, but that’s only happened a handful of times in the last four decades.

      If you’re unable to comply with the court order (either because of the SBP rules or because of your ex-spouse’s lack of action) then you probably need to discuss your options with a divorce lawyer who’s experienced with the Uniformed Services Former Spouse Protection Act. Depending on the terms of the court order she may be considered eligible for more than you’re paying via your personal check.

  2. […] what you overlook in your analysis, your pension will provide you with a basic standard of living. Your spouse will probably want the full Survivor Benefits Plan coverage, too, unless they have their own assets or prospective […]

  3. Reply
    Gus Molina December 29, 2014 at 12:08 PM

    Who can I contact about reducing my SBP monthly payments or reduce the elected amount to the standard base amount. I heard I had some time after retirement. At this moment I am 62 years old and retired in October of 2013.

    • Reply
      Doug Nordman December 30, 2014 at 7:15 AM

      Thanks, Gus, great question.

      The DFAS website says “The SBP election you make at the time of your retirement is very difficult to change” and “Please note that this window is an exit only, not an entrance, meaning that it applies only to withdrawing from an unwanted election and does not allow retirees to begin an election that they had earlier declined.”

      See their information (and contact numbers) at http://www.dfas.mil/retiredmilitary/provide/sbp/change.html

      My interpretation of their wording is that between months 25 and 36 of retirement (in your case, Nov 2015-Oct 2016) you’d be able to cancel your SBP. However I don’t see any provision that would allow you to reduce it.

      It’s remotely possible that DFAS would later have an open-season window to allow canceling or reducing benefits. However those have only happened four times since the 1970s, and the last time was 2005. I wouldn’t count on it happening again in my lifetime, and certainly not at a convenient time.

      However it’s worth your time to contact DFAS now and explain the situation to see whether there’s a waiver or other provision for financial issues.

      Note that if the beneficiary is still alive and married to you then reducing or canceling your SBP is their decision, not yours.

  4. Reply
    Fixing The Fixed Indexed Annuity December 24, 2013 at 1:20 PM

    […] retirees, and their families receiving survivor benefits, already have enough annuitized income. A military pension offers enough longevity insurance […]

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  7. […] whether it’s active duty or Reserve/Guard, then spend some serious time considering the Survivor Benefits Program. (Actually it’s not your choice– your spouse has to decline the insurance or else it […]

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  11. Reply
    lad February 3, 2012 at 6:21 AM

    Doug

    I should have completed the story for you and neglected to do so and that is “Children are all grown up and gone and unfortunately, so did my x-wife decide to do so. I am divorced with no dependents. So, my point is I’d like to discontinue the payments. Those payments can be better used by me trying to eke out a living.

    • Reply
      Doug Nordman February 4, 2012 at 3:09 PM

      I’m not a financial adviser, and you’d want to run this response by your financial adviser and/or your divorce lawyer.

      I think you need to make sure that DFAS knows you’re divorced with no dependents. For example, from the Military.com link in the post (http://www.military.com/benefits/content/survivor-benefits/survivor-benefit-plan-faqs.html#EC):
      Question 12. My spouse and I were recently divorced. Will my SBP cost deductions stop?
      Answer: Yes. If you no longer have an eligible spouse beneficiary under SBP, upon receipt of a divorce decree, the costs will stop and your spouse coverage will be suspended.
      The mailing address is:
      Defense Finance and Accounting Service
      U. S. Military Retirement Pay
      PO Box 7130
      London KY 40742-7130
      FAX:1-800-469-6559

      There are divorce situations where you might have agreed to continue SBP coverage, but your divorce agreement should have the court’s instructions on your responsibilities. If you’re not required to provide SBP benefits as part of the divorce agreement then DFAS should be able to cancel the SBP and stop deducting the payments.

      Although you may be able to stop paying SBP premiums, your refunds might be limited by the date of the divorce decree and when you notify DFAS.

      I’m sure that other military retirees have this question too, so please let us know how it works out!

      • Reply
        rick macarelli April 2, 2014 at 4:16 AM

        Hi, the very last comment on page is about SBP payment eefunds in the case of divorce. Is this still the case and do you know the time when they will reimburse the payments? Thank You

        • Doug Nordman April 3, 2014 at 4:52 PM

          Thanks for your question, Rick!

          The DFAS SBP page at http://www.dfas.mil/retiredmilitary/provide/sbp/change.html says:
          “If you remove your former spouse from the plan, any premiums deducted beyond the date of divorce will be refunded. If you choose to voluntarily cover your former spouse under the plan, you have until one year after the date of divorce to do so.”

          I’m not sure how long they’ll reimburse the payments– you should contact DFAS right away to sort that out.

  12. Reply
    lucien a. desrosiers January 25, 2012 at 7:34 AM

    Mr. Norman
    Even with divine intervention, I have to believe I won’t make the 360 payment requirement to achieve “paid-up” status. If so, what’s the deal for my beneficiaries? I was one who retired from the Guard (along w/8 years AD) at age 60, took the election as required at 55 but do the math, I’m now at age 69 w/only 112 payments to my credit. 360? You see where the divine intervention comes in. lol.
    So, my question is what if I don’t make it to that 360 paid-up status. What can my beneficiaries expect to realize?
    Thank you
    lad

    • Reply
      Doug Nordman January 25, 2012 at 8:24 AM

      LAD,

      The SBP’s 360-payment “paid up” feature is indeed nearly useless for most Reserve/Guard, but I think it was intended to remedy complaints from active-duty retirees. 30 years was probably chosen to reflect the right balance of benefit vs subsidy for the active-duty demographic, who might otherwise be paying premiums for 40-50 years.

      However everyone’s SBP coverage continues as long as their beneficiaries are alive. I’m not even sure that you can cancel the coverage without the (living) beneficiary’s concurrence, although I’m not an expert on the program.

      So no matter how many SBP payments you’ve made, your adult beneficiaries are covered for the amount they agreed to when they signed the paperwork. (In almost all cases, your children are only covered by SBP until they reach adulthood.) You’d have to look up the amount of coverage in your SBP paperwork (or consult DFAS), but that coverage remains in effect whether or not you survive all of those next 248 payments.

      Let’s hope for your sake that you beat the system (it’d give me a reason to live!) but you don’t have to worry for their sake.

      — Doug

  13. […] they retired from the military they turned down each other’s Survivor Benefit Plans.  They’ve bought term life insurance on each other that they plan to keep until he’s […]

  14. Reply
    Doug Nordman April 14, 2011 at 7:21 PM

    I don’t have any solutions here, Jan, but one possibility is to keep alert to another open enrollment period for the SBP. But that’s unpredictable.

    When we first retired I kept a pretty tight grip on the purse strings. My spouse was fine with that because her frugality makes me look like a spendthrift. However nearly nine years later after coming through two recessions with an intact portfolio, we’ve both become a lot more comfortable with loosening up a little. We know we can always fall back on our black-belt frugal skills if it becomes necessary.

  15. […] earlier post describes the SBP and its options, as well as the pros and cons of buying it for your survivors. If […]

  16. Reply
    Jan April 14, 2011 at 4:43 AM

    If there is one large mistake we have made in our financial life is NOT to do SBP. My husband is seven years older. Since his career outweighed mine- I never established a pension with all of the moves. We would have never missed the 6.5% . You play with the money you are used to- I find.
    We have saved well for retirement. His family lives into the early eighties and mine into the early nineties. We should have just done it. It would have saved a few heated discussions in the last few years. My insecurity keeps us from spending our retirement money more freely. Insurance is way to expensive now. Oh well. Don’t look back—too much!

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