02-01-2016 09:00 AM
Content provided courtesy of USAA.
By Joseph "J.J." Montanaro, CFP™
The Survivor Benefit Plan (SBP) gets me fired up because of its value in protecting military families financially.
SBP protects the loved ones of military retirees, or those eligible for retirement, by providing a survivor benefit equivalent to 55% of the retiree’s covered retirement pay.
For example, if your monthly retirement pay is $3,000, your beneficiary would receive an initial payout of $1,650 per month should you die. Of course, there’s a cost for that protection, but in this scenario it would be a reasonable $195 per month, or 6.5% of your retirement pay.
Although some people may find it hard to get excited about the nitty-gritty of financial planning, SBP is a program that you should consider seriously as you leave the service.
Here are five reasons why:
SBP is inexpensive. SBP coverage typically costs less than life insurance and should be replaced only with permanent insurance such as whole life or universal life. While term insurance initially may be less expensive and look like a good way to go, it can become very expensive, if not unavailable, in your later years, which is probably when you will need it most.
SBP is a pretax expense. One reason SBP is hard to beat is the premium you pay is deducted from your retirement pay on a pretax basis. If you’re paying 25% in income taxes (state and federal), that means you would have only $146 left after taxes to buy insurance to replace SBP.
SBP provides hundreds of thousands of dollars’ worth of protection. In the example above, today’s value of what the beneficiary receives over time is approximately $500,000. So, if you’re looking for life insurance to replace SBP on a dollar-for-dollar basis, you would look at a $500,000 policy.
SBP is inflation-adjusted. How did I figure out the payment above would be worth $500,000*? Much has to do with one of the features I like most about SBP: The benefit is adjusted annually for inflation. In this example, I used a 3% inflation rate. By the time the survivor passed away at 82, the annual benefit was nearly $60,000 per year. That cost-of-living adjusted protection is difficult to duplicate.
SBP requires no decisions. Having worked with a number of members who recently lost a loved one, I know the peace of mind that comes with having a monthly check to pay the bills. Life insurance provides valuable protection, but generally it also pays out in the form of a single big check. That’s not a bad thing, but again, it requires decisions and comes at a time when the survivor may have other pressing business.
Maybe you’re the exception to the rule and wouldn’t need to replace your military retirement income in the event of your death. But for most people, that’s not the case.
SBP, along with life insurance, can be an important part of your overall protection package. That doesn’t mean everyone needs to sign up, but it definitely makes sense for most.
*Initial SBP benefit $19,800, 3% inflation, 5.5% discount, 38-year benefit period