Military spouses, one of the biggest decisions at retirement rests squarely on your shoulders: whether to elect Survivor Benefit Plan (SBP) coverage in retirement and how much?
Military retirement income ends with the death of the retiree. If you outlive your military spouse, you may need additional income. SBP is similar to life insurance, except that it provides inflation-adjusted income for the rest of your lifetime, paid for with pre-tax dollars.
There are all sorts of arguments for and against SBP coverage, and there is no single right answer. Heck, even for one family, there might be a couple of different ways to accomplish the same financial goals.
There is a lot of information required to make a good decision, and this is just an overview of the "non-basics." Be sure to read all the linked material to understand all the details.
Where Are You, and Where Do You Want To Be?
Step one in the process is to identify your current financial situation and your long-term desires. It helps to think of SBP in two different ways: first as income for a retired widow or widower, and also as income for a widow or widower who is still in their working and childraising years. Because SBP is permanent life insurance, it accomplishes both these goals, but they are different and have to be considered differently.
List all the sources of income that would be available if your spouse dies, and note whether this would be available at any age or only after reaching retirement age. Depending on your situation, this might include:
- Social Security benefits,
- Thrift Savings Plan balances,
- your own retirement assets,
- Individual Retirement Arrangement accounts,
- rental real estate,
- any other investment accounts,
- Dependency and Indemnity Compensation benefits,
- anything else that produces income.
Think critically about the balances in these accounts and how long they might last under different scenarios. The math can be challenging; a good fee-only financial planner can help you explore the possibilities.
Then, identify your goals. Try to paint a mental picture of what you would do if something happens to your spouse. There are a lot of variables that impact your income needs, and it's hard to pin those variables down if you don't know what you might do. Would you remain in your current home, or move elsewhere? Would your work situation change, either working more or working less? How would your living expenses change without your spouse: more babysitting? lower insurance costs? Put together a ball-park figure out how much money you would need to live, and how much income you already have. Is there a shortfall?
Know Your Benefits
One thing that surprises me when working with survivors is that many people have no idea what benefits and programs may be available. Not everyone is a planner and benefits geek like me, and that's OK. However, you can't make a good decision about SBP without knowing how much life will cost, and you can't know that without knowing what benefits will be available.
There are two super-important benefits factors to consider with regard to SBP:
- the likelihood that you might be eligible for Dependency and Indemnity Compensation benefits, and thus be subject to the SBP-DIC offset rules, and
- the rules regarding SBP payment and remarriage.
It is vital that you understand these two important factors in order to make a fully informed decision.
Investigate Your Spouse's Insurability
One of the really great features of SBP is that there is no medical qualifications. Many military members think that they would rather use other forms of insurance and discover that their age or medical situation means that private insurance is unaffordable. It is essential that you find this out before declining SBP. If you choose to use private insurance in lieu of SBP, I strongly advise you to pursue this several years before retirement so that the entire process is complete well before retirement. You can't just call and get life insurance - it takes time!
It's A Permanent Decision
For active duty families, the decision to take or not take SBP is basically permanent. If the retiring service member has eligible family members, and does not elect SBP, there is no way to add that coverage later. In addition, there is no provision to change the type of coverage after retirement, except when children age out of coverage or in the case of divorce.
If a retiree elects SBP coverage, there is a single window to terminate coverage. This occurs between month 25 and month 36 of retirement. There will be no refund of premiums paid.
There are rare situations when the SBP program will declare an "open season" for enrollment. These occur after major benefits changes. If an open season were to occur in the future, enrollment typically requires a buy-in equal to the amount of all premium payments since the time of retirement. Please do not make any decisions based upon the belief that an open season will permit you to join SBP at a later time. Open seasons are extremely unusual, and there aren't really any kinks in the program to iron out, meaning the likelihood of future open season is slim.
The Sleep At Night Factor
Lastly, which choices will help you sleep at night? I like SBP because it provides lifetime income with cost-of-living adjustments. I wouldn't be able to live a full life if I was worried about outliving a life insurance payment. You may feel very differently, and hate paying those monthly premiums on a policy you may never use, or you may find that a term policy accomplishes your goals at a lower cost.
How The Spouse Decides
In theory, this is a decision being made by the retiring service member. However, any election that is less than full requires that the spouse sign off to establish that they understand what is being chosen. In that way, the spouse has the "last say" in SBP elections. Many spouses don't know enough about SBP to make a good choice, and it is just one of the many things happening during a busy time. Don't wait until the last-minute to start investigating.
The Survivor Benefit Plan is a great benefit that provides financial security for the survivors of military members and retirees. However, you can't make a good decision without all the information. Do a lot of research and ask yourself a lot of questions before deciding.
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