9156 / Do military retirees have the option of selecting a survivor benefit plan?
The DoD retirement plans come with the option to select a survivor benefit plan (SBP) for surviving spouses of retired veterans. The SBP provides up to 55 percent of a retiree’s monthly pension payment to the surviving spouse or qualifying child upon the death of the retired veteran.1 The program requires the retiree to decide to participate or not to accept this benefit at the time of retirement. The cost of this plan is 6.5 percent of the base benefit amount. For example, if a retiree has a defined pension benefit amount of $5,000 per month and decides to cover 100 percent of that amount through the SBP, then surviving spouse would receive $2,750 per month for life, indexed to inflation. The cost of the coverage is 6.5 percent of the $5,000 base pay or $325 per month. The premiums for the SBP come out of the retiree’s pension pay before taxes, so the effective cost, at the 28 percent tax bracket, is $234. After 30 years of paying premiums and attaining the age of 70, the policy is considered paid up.
Planning Point: There are some options the retiring servicemember should consider prior to opting for the SBP. The first is what other options exist for the cost of the premium. The term “retiree” generally connotes a person in his or 60s or 70s. However, military retirees are generally healthy and in their 40s when they retire from the armed services. Permanent life insurance could be a viable solution for some retirees in lieu of the “use it or lose it” SBP. Additionally, several whole life and indexed universal life policies come with long-term care riders that help buy down the risk of a long-term care stay as a result of Alzheimer’s or other serious diseases. It is also possible that the cash value built up in the policy over 20 to 30 years in retirement could provide a source of tax-free income later into retirement to help offset rising inflation and medical care. Justin L. Baker, JD, MBA, Army Reserve Lieutenant Colonel, Candidate for LLM in Wealth Management and Masters in Strategic Studies at the U.S. Army War College; https://www.bakerwealthstrategies.com/welcome/
1. Herndon, Molly. “The Survivor Benefit Plan: Pros and Cons.” Military Families Learning Network, 4 Aug. 2017, militaryfamilieslearningnetwork.org/2017/08/04/the-survivor-benefit-plan-pros-and-cons/