I run into a lot of people who balk at the price of the Survivor Benefit Plan (and the reserve component version, as well). They typically respond with a gruff “I don’t want to pay that” statement and then claim they’ll just buy a life insurance policy instead.
Some people also say they don’t want their pay “reduced” in order to cover their spouse. I have a counter to that. When you receive your leave and earnings statement and see a deduction for Servicemembers Group Life Insurance or an allotment for a car payment, is your pay being reduced or are you paying for a product or service? The answer, naturally, is you’re paying for a service / product.
Sure, the reserve component survivor benefit plan can equal as much as 3.5% of retired pay and its active component version can be as high as 6.5% (reservists pay both premiums when they receive retired pay. The rules are slightly different for active duty retirees). Ten percent of your money coming out of your monthly payment can seem like a lot and life insurance can be a tempting alternative. Is it the best idea, though?
I have found it best to compare life insurance to the SBP and see how things pan out. I am going to do this for you in this article. For this comparison, I am going to use the example of a master sergeant (or pay grade E-8, for those of you who are not Army) who has 5,000 retirement points.
This individual would have, roughly, a $2,000 per month retirement payment. His SBP premium for a spouse (who is three years younger than he is) would be around $200. That sounds like a lot, yes, but let’s take a closer look at the numbers. I am including a copy of my calculations in the resources section so you can follow along, if you like.
Let’s assume this person has a $250,000 life insurance policy and dies this year at the age of fifty-four. For a fair comparison, we’ll also assume the widow only draws from the payout the same amount of money she would get in survivor benefits (she would likely need more to sustain herself). If the widow were to take from that policy only the amount she would receive from the SBP ($1,100 per month which is 55% of the service member’s retirement), she would run out of money at the age of seventy-one. It is possible to outlive a life insurance policy but you cannot outlive the survivor benefit plan.
The actuaries at the Department of Defense (read bean-counters) estimate the widow would live until the age of eighty-five. This means she would have fourteen years without any money from the life insurance policy (we won’t count other streams of income). If the husband’s intent had been to provide enough money for her to live at least at a subsistence level (again without considering other income), he has fallen short. My calculator estimates he would need over $550,000 in life insurance in order to allow her to survive until eighty-five. If he wanted her to have twice as much money each month ($2,200), he would need over $1.1 million.
This is a lot of money no matter who you ask. Now let’s take the cost of life insurance into account. Not only that, let’s take the husband’s age into account. A fifty-seven year old man who is seeking $550,000 in life insurance is going to pay a hefty premium for that much coverage even if he is in good health and doesn’t smoke. Now imagine what it could be if he wanted twice that much insurance.
I had a man who was wanting to do just this. I told him he would face a much higher premium than the SBP premium for equivalent life insurance. He decided to check anyway (and I applaud him for it). He wanted $800,000 in coverage and went to one of many life insurances websites for a quote. The best offer he was able to get as a premium was $788 per month. The SBP amount was less than half of that. He decided to do what I suggested which was in that case to keep the amount of life insurance he currently had and take the SBP coverage. He chose to do just that.
My suggestion to that person is exactly what I typically recommend to people who bring up the life insurance option. Supplement the SBP, I say, but don’t refuse it. Most people accept my advice, thankfully.
Now let’s talk about a few other items of interest regarding the survivor benefit plan. First, the premiums you pay only come out of your retired pay. You would pay for a life insurance policy as soon as you agree to take out the policy whether you’re receiving retirement or not. Next, the premiums are not taxed. They come out before taxes on your pay are computed (try that with a life insurance policy). Lastly, the survivor annuity is indexed for inflation every year; a life insurance policy stays the same no matter how much time passes.
That’s enough of my ranting for one day. I hope this article has provided some information worthy of your consideration. If you have any questions or comments, please post them below. I always like knowing what others are thinking.
Thanks for joining me today and, of course, thank you for your service.