Overview of the Survivor Benefit Plan
Retired pay stops when you die!
The Survivor Benefit Plan (SBP) helps make up for the loss of part of this income. It pays your eligible survivors an inflation-adjusted monthly income.
You must pay premiums for SBP coverage once you retire. Premiums are taken by reducing retired pay, so they don't count as income. This means less tax and less out-of-pocket cost for SBP. Also, using conservative fiscal assumptions, the overall plan is partially funded by the government, so the average premiums are well below cost. This subsidy means an attractive plan for most people. The subsidy is an average and should not be considered to apply in every case.
Basic SBP for a spouse pays a benefit equal to 55 percent of your retired pay.
Eligible children may also be SBP beneficiaries, either alone or added to spouse coverage. In the latter case, the children get benefits only if the spouse dies or remarries before age 55. Eligible children equally divide a benefit equal to 55 percent of your retired pay. Child coverage is relatively inexpensive because children get benefits only while they are still your dependents.
You may choose coverage for a former spouse or, if you have no spouse or children, you may be able to cover an "insurable interest" (such as, a business partner or parent).
SBP As Insurance And Other Estate Planning Information
We buy insurance as a way to cope with major financial risks. We buy it to protect us from the financial hardships of events we can't foresee, like car wrecks and house fires. It protects our valuable assets.
Your retired pay is one such valuable asset. Since it stops when you die and you can't foresee when that will be, it may be useful to insure it.
SBP is a way to do this; it is a form of life insurance for part of your retired pay. But SBP premiums and benefits differ from those of most other insurance plans.
Like life insurance, SBP protects your survivors against complete loss of financial security when you die. But, SBP does more! It also protects your survivor against the possibility of outliving the benefit. Many insurance plans pay only a fixed benefit that may run out years before the survivor dies.
Besides long life, another unpredictable reason your survivor may outlive the benefits is INFLATION! SBP protects against this risk through the Cost of Living Adjustment (COLA). Inflation may be the biggest financial uncertainty of all. It erodes the value of fixed incomes, making them worth less and less as time goes by. Few, if any, private insurance plans will fully insure your survivor against the ravages of inflation.
In fact, no known insurance company has guaranteed to match SBP benefits at equal cost or less. One reason is SBP premiums have a built-in discount, making the plan a good buy for most people. Plus, a private insurer needs to cover administrative expenses and make a profit and these are not accounted for in SBP premiums, thus increasing the subsidy.
And, SBP premiums reduce your taxable income and cut your out-of-pocket cost for coverage. SBP benefits are taxed as income to the survivor, but the tax rate should be less than you now pay. Most insurance plans are the reverse; premiums are paid from after-tax income, while survivors are not taxed on the proceeds.
In effect then, SBP protects part of your retired pay against the risks of:
Still, SBP alone is not a complete estate plan. Other insurance and investments are important in meeting needs outside the scope of SBP. For example, SBP does not have a lump sum benefit that some survivors may need to meet immediate expenses upon a member's death.
On the other hand, insurance and investments without SBP may be less than adequate. Even if they could duplicate SBP, investments may be much more risky and rely on a degree of financial expertise many don't have. Consider everything carefully. Don't expect SBP to do it all, but give it full credit for what it does.
Is SBP a Good Buy?
Given the expected subsidy, the answer to this question for most retirees is yes! Whether SBP is a good buy for you depends on personal preferences and your age, sex, and health compared to your beneficiary's. Beyond this, the answer lies in three questions you should ask yourself.
First, is SBP a product I can use? Personal preferences may control your answer, but a subsidized lifetime inflation-protected income is very attractive to most people.
Second, how much SBP can I use? If you know when you'll die, how long your survivor will outlive you and how much inflation will occur, you have the answer. The unknown future is the problem, but SBP meets the need! Even if you die shortly after you retire and your spouse lives for 50 more years and if inflation is higher than expected, SBP will still be paying. It will probably be paying a lot more than anyone ever expected because inflation has such a strong impact over a long period of time. In fact, survivors who began to get SBP benefits in the early 1970s have seen their benefits more than tripled through annual COLAs!
Third, how much SBP can I afford? The benefits do carry a price tag, but due to the subsidy and lack of administrative costs and profit, the plan should be attractive for most members. And remember: The tax advantage on premiums reduces your out-of-pocket cost.
Caution! Some people think they can join SBP years after they retire, during a so-called "open season." In the 25-plus-year history of SBP, only four times have retirees had a second chance at SBP. Each time was after major plan improvements. The second time, premiums were raised for new joiners to help make up for the missed premiums. The third time, new joiners were required to pay all missed premiums with interest, plus an additional amount to protect the solvency of the Plan. Open enrollment elections have typically required a period of time (two years) before the election is actually effective. This prevents too much adverse election (people joining with short life expectations).
Don't count on an open season. Although an open season may be enacted by special law, they are not part of the regular Plan. No more are expected, and it won't give your survivors any peace of mind.
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