Why You Should Care About the Survivor Benefit Plan

June 28, 2013

By Jennifer Wake
AFC® Candidate
FINRA Military Spouse Fellow

In most circumstances, when servicemembers retire at 20 years they will receive a “pension”.  A pension is defined by Merriam-Webster’s dictionary as “a fixed sum of money paid regularly to a person, or a gratuity granted as a favor or reward, or one paid under given conditions to a person following retirement from service or to surviving dependents.”   When military members serve 20 years on active duty or 20 “good years” in the reserves they can retire and receive retirement pay from the government.

But if the servicemember should die suddenly what happens to the spouse?  In traditional pension plans, the spouse may lose all benefits.  The government does not want military spouses to face this loss of income so the Survivor Benefits Plan (SBP) was created.  SBP is decided upon at the time of retirement.  SBP is an annuity, which is a form of insurance.  It guarantees a series of payments to be received at stated intervals (monthly for military) over the life of the beneficiary (spouse or children) starting upon the death of a servicemember after retirement. This annuity is a guarantee for the continuation of a portion of the servicemember’s pension. 

When the servicemember retires both the servicemember and the spouse must decide on SBP.  SBP comes with many decisions.  The first decision is who the beneficiary will be.  The choices are: Spouse, Child(ren) only, Spouse-and-Child(ren), Former Spouse, Former Spouse-and-Child(ren) or Natural Interest Person (if the servicemember has no other eligible dependents, he/she can elect to cover an individual in whom they have a legitimate insurable interest).  Examples might be a brother or sister, or a child who is beyond eligibility for child coverage. These benefits are different from child(ren) or spouse benefits.  For the Spouse option the servicemember must be currently married.  (If you marry after retirement there is a one year period to add a new spouse). Spouse-and-Child(ren) means the spouse is primary but if they die or remarry before 55 the benefits pass on to the eligible children.  These also apply to former spouse and former spouse-and-child(ren).  But the former spouse and former spouse-and-child(ren) elections come with some complications due to court decrees, so seek advice or more information from a financial counselor or the legal office.  For more information on beneficiaries visit the Defense Finance and Accounting Service.

The default for SBP is 55% of the servicemember’s retirement pay.  This will cost only 6.5% of the servicemember’s retirement pay.  Paying 6.5% of retirement pay will guarantee the spouse 55% of the military member’s retirement for the spouse’s lifetime.    This is the maximum benefit a spouse can receive.

Now let’s review some of the actual numbers.  Let’s assume that a retired servicemember receives $2200 per month.   SBP will cost 6.5% of $2200, which is $143 per month.  Leaving the retiree with $2057.  If the retiree dies, the spouse will continue to receive 55% of $2200, which is $1210 per month. 

For base amounts less than $1,091.00 the calculation is a prorated percentage.  If a retiree receives $300 per month in retirement, SBP will cost $7.50 per month and the spouse will receive $165.00 per month. (A cost of 2.5% rather than 6.5%).

If the servicemember decides that he has enough savings to last through his lifetime and his spouse’s lifetime, to decline SBP BOTH the servicemember AND the spouse must agree in writing.  If one does not sign to decline coverage then SBP is automatic.  This also applies to lowering SBP coverage.  To change from 55% to lower (the lowest amount allowed is $300 per month) both spouses must sign an agreement to the change.

By accepting SBP the servicemember can make sure his/her spouse is taken care of for life.  However, SBP premiums are not paid indefinitely.  Once the servicemember is older than 70 AND has paid into SBP for 30 years then it is fully paid up.  This is a significant benefit for younger retirees.  If a servicemember joined when he/she was in their 20’s and retired in their 40’s SBP would be fully paid by the time the servicemember was in their 70’s.

Some people ask what happens if their spouse dies first. If the spouse dies first these benefits are not used. If the spouse dies or divorces, the servicemember can stop SBP payments at that time by contacting DFAS and showing either a divorce decree or death certificate.

Decisions about SBP are made at the time of retirement.  People have said “you can change SBP if you want later.”  This statement is rarely true.  Retirees can enroll later if there is open enrollment.  But open enrollment is VERY rare.  Open enrollment has happened only 4 times in 25 years.  Plus when a retiree enrolls late, he or she must pay all back premiums from the time of retirement, which can be substantial.  

Opting out of SBP may not be a good financial decision for most servicemembers and their families.  If a retiree has millions in his or her retirement savings and the spouse has their own guaranteed pension then opting of SBP may be a valid choice.  But retiring military should be careful about ever giving up a guaranteed benefit.  Once SBP is declined, a servicemember can rarely go back and change it.  For only 6.5% of monthly retirement, the retiree can guarantee security and peace of mind for his or her family.

For more information about SBP visit dfas.mil.

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