There is a great deal of confusion surrounding the Survivor Benefit Plan (SBP) available to retiring military personnel. By law, a military pension is payable to the military retiree as long as he or she is alive, but does NOT automatically transfer to a spouse (or minor dependents) upon the death of the retiree. SBP is a form of protection (similar to life insurance) on the military pension that is offered by the Department of Defense.
Active duty personnel who are retirement eligible are automatically protected under SBP at no cost. This means if a soldier should die on active duty, his or her dependents are eligible to receive a portion of the military pension that would have been payable to the soldier.
Retirees are not automatically enrolled in SBP, but rather must elect SBP prior to their official retirement date. Premiums are paid for the SBP coverage as a percentage of the monthly pension payment. Several options are available when enrolling in SBP with regards to how much will be paid and to whom the benefit covers (ie spouse and/or minor children).
A spouse can receive up to 55% of the military pension upon the death of the retiree. This protection comes at a price: 6.5% of the monthly gross pension. The premium paid for SBP is pre-tax. Thus a retiree’s total taxable pension income is reduced by the amount of SBP premiums paid. The SBP annuity is determined by the base amount elected. This may range from a minimum of $300 up to a maximum of the full retired pay. The annuity paid to the survivor will be 55% of the base amount selected on the date of retirement. The base amount and payments to the survivors will increase as annual cost-of-living adjustments are made to the military pension.
A military pension is a financial asset for the retiree’s family. Thus, losing the pension poses a financial risk. SBP is one method to mitigate this risk. The protection afforded SBP is comparable to a life insurance policy that is available on the commercial market with some distinct differences, advantages, and disadvantages. One advantage of SBP is that the benefit is adjusted for inflation. The death benefit on most life insurance policies remains fixed and is not adjusted for inflation. Another advantage is that there are no medical underwriting requirements to qualify for SBP; all retirees will qualify for SBP upon their retirement from active duty no matter their medical history. Almost all commercial life insurance policies require medical qualification on the insured, and thus if the retiree is in poor health or has an unfavorable medical history, he or she may not qualify for life insurance or the premiums may be very expensive.
Since the death benefit available through SBP is available throughout the life of the retiree, it is more like a permanent form of life insurance as opposed to a term life insurance policy. All term policies expire after the contracted number of years, and are very rare for an insured in the ages of 70 or 80 years old. A permanent life insurance policy (such as whole life, universal life or variable life) provides coverage throughout the life of the insured and includes a cash value component. The growth of the cash value of a permanent life insurance policy is dependent upon the active management of the investment account within the policy – an added risk is thus inserted to achieve a better growth potential. On the other hand, SBP is as risk-free as the United States military pension fund. The cash value of a permanent life insurance policy could provide a lump sum source of cash. SBP does not provide a lump sum to the beneficiary, only a monthly payment, which will continue for the life of a beneficiary spouse.
How do I implement SBP?
Your military finance office handling your retirement will process all the paperwork involved with enrolling in SBP. You will also receive group training and individual counseling on SBP upon retirement. Your decision to enroll in SBP must be made prior to your final day on active duty. Your spouse must consent in writing if you do not elect the full amount of SBP.
As a new SBP participant, you have a one year window to terminate SPB coverage. This occurs between the 2nd and 3rd anniversary following the beginning of retirement pay. If you choose to terminate SBP, you will not be refunded any previously paid premiums and no annuity will be paid to your beneficiaries upon your death. Your spouse or former spouse must consent if you withdraw from SBP. Future enrollment in SBP is barred once terminated.
SBP premiums will also stop when there is no longer an eligible beneficiary in a premium category. For example,
- Children are no longer minor dependents and have no incapacity
- Spouse is lost through death or divorce
- An insurable interest person dies or coverage is terminated
There are several choices available in the case of a divorce. Further, SBP may be resumed under certain circumstances, for example, an adoption. Total VA disability ratings also impact the options available with SBP.