Survivor Benefit Plan Wants Permission To Do The Right Thing

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[December 2015 update: Congress fixed this issue as part of the 2015 National Defense Authorization Act.]

[March 2016 update (yeah, 15 months later!): DFAS has just opened SBP registration to these retirees.]

Military Times is reporting the story that the Defense Finance and Accounting System didn’t want to announce. DFAS has made military retirement (and divorce) more complicated than ever.

If you’ve assigned your Survivor Benefit Plan to an ex-spouse (either voluntarily or through a court order) then if that ex-spouse dies the SBP policy now terminates.  You are no longer able to transfer your policy to another spouse after the death of the insured ex-spouse. The only way that you can transfer the SBP policy to a new spouse is with the permission of the insured ex-spouse, who will then permanently lose the insurance.

Image of Defense Finance Accounting System Survivor Benefits Plan pillow |

The pillow has lost some stuffing…

In other words: if the SBP policy’s beneficiary ex-spouse dies before the retiree, the policy ends. It can no longer be transferred to another spouse. It doesn’t matter how much you’ve paid in premiums, or for how many years.

[This change only affects policies covering an insured ex-spouse who dies before the retiree. There is no change to the SBP rules when an insured current spouse dies before the retiree.]

Before 2013, DFAS permitted a policy transfer after the death of an insured ex-spouse. The logic appears to have been that the retiree paid for the policy and was entitled to reassign the benefit. If the insured ex-spouse died while the retiree was alive, then the retiree (the policy owner) was entitled to transfer it to their current spouse. This DFAS policy was especially compelling in 2008 when the SBP law was changed to “paid up” status. (Retirees who are at least 70 years old and have paid premiums for 30 years are considered to have fully paid for the policy and no longer have premiums deducted from their retiree annuity.) If the ex-spouse died while the retiree was alive, the policy remained in force (because it was paid up) and the retiree was allowed to transfer it to their new spouse.

In 2013, DFAS staff changed their interpretation of the federal law behind SBP. Now if the ex-spouse beneficiary dies while the retiree is still alive, the policy is considered terminated. The retiree can no longer transfer the policy to a current spouse, even if that policy is paid up.

According to Military Times, DFAS did not publicly announce this change– nor do they appear to have made an attempt to inform the retirees who have paid for the policies. The Military Officers Association of America learned of this change from its affected members. MOAA staffers have been discussing the situation with DFAS.

DFAS apparently feels that the law does not actually permit them to re-assign the deceased ex-spouse’s policy, even though this policy has probably existed for over 40 years. The federal law does not specifically allow this, so DFAS wants Congress to pass a new law which explicitly permits them to do what they’ve done for decades. DFAS staff has even drafted an example of the law that they’d like Congress to pass for them. However, until a new law is passed, DFAS seems to feel that it’s appropriate to re-interpret the existing law now. If they weren’t permitted to make the promise before, then it seems fine to them to terminate the commitment. However, this change has been an unpleasant surprise. Military Times reports that over 1100 retirees were permitted to re-assign policy benefits before 2013, but now three retirees have already paid the price of the policy change.

It’s impossible to predict how long it would take Congress to change the law, but it could be years– even a decade. Some of you older retirees may remember the former SBP Social Security offset. It took over 30 years of Congressional lobbying by military advocacy organizations for the SBP Social Security reduction to be eliminated.

Again, DFAS’ new interpretation of the law only affects insured ex-spouses who die before the retiree– not current spouses. If a beneficiary (current) spouse dies before the retiree, then the SBP is considered suspended. If the widowed retiree remarries then they can reinstate the SBP for the new spouse.  That language is still on DFAS’ website, and presumably, their legal interpretation has not changed.

DFAS’ unannounced 2013 policy change can be very expensive because the maximum SBP premium is 6.5% of a pension. An O-4 who retires today could expect a High-Three pension of about $42K/year. If the O-4’s spouse elects the full coverage of SBP (it’s the spouse’s decision, not the retiree’s choice) then over the next 30 years they’ll pay about $82K in premiums. If they’re at least 70 years old at that point, then the policy is considered “paid up”.  A retired E-7 could expect to pay at least $48K of SBP premiums before reaching the 30 years/age 70 paid-up status.

SBP is still one of the world’s cheapest insurance policies. The federal government subsidizes at least 40% of the premiums, and the policy benefit is an inflation-adjusted annuity. No commercial insurer can offer an equivalent policy at that premium, and it would require hundreds of thousands of dollars of personal wealth to self-insure. Most spouses of male military retirees should elect SBP coverage unless they have their own pension or personal assets. If you’ve already decided to use SBP at retirement, then that’s still a good choice.

SBP is also a very popular financial tool during divorce. It’s cheaper for the retiree to assign the policy benefit to the ex-spouse than it would be to surrender the equivalent amount of assets. The ex-spouse may have sacrificed years of their human capital earnings potential to support the retiree’s career, and this is a chance for them to receive some financial security at a very affordable price. Every divorce is different, but if it made sense to assign SBP to the ex-spouse before this policy change then it’s still a good choice. Now that divorced military retirees are learning of this policy change, if they remarry then they can decide on different insurance for the new spouse.

If a divorced military retiree asks an ex-spouse to surrender their SBP policy under DFAS’ new interpretation, the ex-spouse pays a very high price to agree to the request. However, DFAS seems to feel that they never had the authority to switch the SBP beneficiary after the ex-spouse’s death, and now they’ve placed the burden directly upon both divorced spouses.

DFAS is complying with the letter of federal law by requesting corrective legislation for their new interpretation. However, in my opinion, they crossed an ethical line by not requesting a waiver to continue with their current policy (pending corrective legislation). Their lack of publicity also gives the impression that they’re trying to conceal the way they implement their reviews and decisions.

And changing their SBP beneficiary policy without even announcing the decision, let alone educating retirees and beneficiaries? That’s just plain wrong.

Related articles:
Military Insurance: SGLI, VGLI, SBP, And Other Benefits
More SBP Details
The Reserve Component Survivor Benefit Plan
Survivor Benefit Plan

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.

  1. When we opted out of SBP when I retired in 2008 I knew I jointed the list of those cast into the outer darkness. How could we do such a thing? The risks we were taking. At TAP class others assumed I lost my mind, or hated my wife. In the face of DOD propaganda to the contrary.

    But as the years go along, and the list of administrative misdeeds, management incompetence, and ineptitude with the program, I do not doubt my decision one bit.

    If this is, was, and remains the best deal since sliced bread, someone needs to explain why one needs to remit 6.5% of their retirement, like forever, for at best .55 cents on the dollar. And oh, by the way, transfer said benefits to a NOK, good luck, and oh, your paperwork is lost after 35 yeas of payments.

    Much like putting your entire healthcare life in the tender mercies of the VA. Good luck. If there is one positive coming out of the retirement reform commission is putting this turkey to its final rest.

    • I think SBP is a good program for the spouses of many military retirees, especially those who have sacrificed their own careers (and human capital, and 401(k)s opportunities, and pension prospects) for the servicemember’s career. If divorce should happen then it’s a very effective asset for settlement negotiations. For retirees with disabled children, SBP is one of the few federal programs for establishing a lifetime special needs trust.

      For people who want this type of longevity annuity, the subsidized premiums mean that the price is unbeatable. I doubt that the MCRMC will be able to replace SBP with a better insurance annuity.

      DFAS’ conduct, however, is wrong and borders on criminal negligence.

  2. Interesting and troubling at the same time. While this currently doesn’t impact me, I can imagine this being a blow to those who’ve paid diligently over the years with certain assumptions of coverage transfer. I do not recall seeing this issue addressed on regular MOAA updates…definitely something that requires attention. Thanks Nords.

    • Thanks for your comment!

      It’s especially worrisome that DFAS didn’t see fit to discuss this change in public. I hope the corrective legislation is quickly passed, but I’m skeptical.

    Comment? Question? What's on your mind?