The Survivor Benefit Plan (SBP) Explained
Feb 20, 2019 | 5 min. read
The SBP is the only way service members can pass on military retirement pay to a surviving family member.
While on active duty, Survivor Benefit Plan (SBP) coverage is free – the government bears the full cost. But leading up to retirement, service members will have the option to continue full or partial SBP coverage by paying a portion of the cost, or to terminate the protection entirely. This is a joint decision; the spouse has to agree with any election that terminates or reduces the level of protection. Keep this in mind as you read the following scenario.
Years ago, John and his wife, Mary, were preparing for his retirement from the military. In his early 40s and healthy, he didn’t give much thought to the SBP. John liked the idea of receiving a larger retirement pension, so he elected to take the minimum amount of coverage.
Fast forward a couple of decades: John and Mary were enjoying their well-earned retirement with John’s $4,000 monthly military pension, $2,200 monthly Social Security benefit, and Mary’s $1,100 monthly spousal Social Security benefit. Though John was the healthier of the two, he passed away unexpectedly, leaving Mary with a drastically reduced monthly income. She went from the $7,300 per month she shared with her husband to only $2,365 per month.
How did this happen? Their decision years earlier to elect the minimum base amount of SBP coverage meant that upon John’s death, his $4,000 military pension was reduced to just $165 per month for Mary. At this time, Mary elected to continue John’s higher Social Security benefit of $2,200 rather than keeping her own lower payment of $1,100.
Had John and Mary selected the full base amount of SBP, Mary’s annuity would have been $2,200 monthly, and she would have received a total of $4,400 monthly upon John’s death ($2,200 from SBP plus $2,200 from Social Security). Instead, their earlier SBP decision resulted in an immediate 66 percent cut in Mary’s budget. John would not have knowingly created this set of circumstances for Mary, but it is a common result of a shortsighted SBP decision.
How can you avoid a similar situation?
At retirement, you’ll determine an SBP base amount, ranging from a maximum of the full amount of your gross retired pay down to a minimum of $300 (the amount chosen by John and Mary). A monthly figure equal to 6.5 percent of that base amount will be deducted from your retirement check in order to pay for the SBP coverage. Upon your death, your surviving spouse will receive 55 percent of the base amount you selected.
Full retirement pay is 50 percent of a retiree’s high-3 average base pay. So, a service member who retired with a high-3 of $8,000 per month would receive retirement pay of $4,000 monthly. The SBP base amount he chooses will determine both the spousal benefit and the premium he pays. The following table illustrates the consequences of three possible selections:
The decision about whether to take SBP, and how much, should not be made lightly. There are a variety of factors to keep in mind that may help in your decision-making process. For example:
- SBP is a government-subsidized, inflation-adjusted, level term annuity paid with pre-tax dollars. Lifestyle and medical factors are not barriers to enrollment. The beneficiary cannot outlive the annuity, which provides an income “safety net,” along with peace of mind for the retiree and the recipient.
- Aside from one window to withdraw from the plan between the 25th and 36th month after retirement, enrollment in the SBP is irrevocable. A retiree will continue to pay the premium until age 70 or 360 payments, whichever is later.
- The survivor’s annuity is taxable income. The premium increases with annual cost of living adjustments, and if the beneficiary predeceases the retiree, the premiums are not refunded. There is no residual estate value for heirs if both the retiree and survivor pass away prematurely.
- Service members who are covered under the new Blended Retirement System (BRS) rather than the traditional retirement pension should remember that since the BRS annuity will be reduced by 20 percent of the traditional retirement system, the SBP annuity will also be reduced by 20 percent.
Military retirement pay stops with the death of the retiree. Surviving family members have no further claim to money from the government. Even with a full SBP election, the benefit replaces just 55 percent of the base amount. For most people this still creates a shortfall. Don’t assume, in other words, that even “full SBP” will meet all of your spouse’s needs.
First Command believes that enrollment in the SBP is the right choice for the majority of retiring service members. However, there are circumstances when it may not be the best choice, so when it comes time to make retirement decisions, be sure to discuss them with your Financial Advisor.
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