In this show, Mike and Amy discuss the Survivor Benefit Program.

They’ll cover:

Purpose of the Survivor Benefit Program (SBP) (3:17)
Overview of SBP (5:13)
Decision Timeline (12:43)
SBP and DIC (14:55)
Reserve Component SBP (16:35)
CSB Redux SBP (18:06)
Thoughts about how to make the decision (19:36)

Links:

Operation Retirement Readiness
Schedule a consultation with Mike

00:00:13 Amy:

If you spend any time on the Internet and maybe on a Reddit board, you’ll see people very passionate about what they think you should do or what they did, for you know, making this big decision. You know, a few of the things you may see is, you know, Skip SBP because it’s expensive and just buy term insurance and invest the difference you may see, you know, other people equally as passionate that everybody should opt into this and really it’s an individual decision. So the pension belongs to the service member, but the Survivor Benefit Plan the spouse has a role in that and meaning they get to decide what happens and if you don’t make a decision you get full coverage if you if your spouse isn’t willing to opt out, so it is a family decision and that’s probably surprising if you if you haven’t dealt with SBP before that, then that is part of the whole process and and plan. But it’s really not unique to the military.

00:03:17 Amy:

Yeah, that’s interesting. And you know it, it prevents the nightmare scenario that used to happen before this was law, where a member who was going to get a pension, be it in the military or outside would go in and say no, I don’t need it. I’m going to keep the extra money. And not even let their spouse know that that was an option years later, the member who had the pension dies and all of a sudden there’s no more income for the spouse, so it was really a protection put in place that if if you’re going to be getting, you know, lifetime income from an employer, the military, whomever hat you know, there is some protection for the the spouse who probably also depends on that that money. Military retirees start receiving their pension in their 40s or 50s. For the most part of your reservists and in the 50s. So if you pass away just a few years in retirement, your family will be without your pension, probably money. They were counting on For Quite a long time. I mean, you probably plan to pass away in your seventies, 80s or 90s, so not passing away or early could be disastrous. So the survivor Benefit Plan allows you to Cover From $300.00 of your pension up to 100% of your pension. That amount that you pick, that’s called the base amount. Then if you pass away your widow or children will continue to receive 55% of that fees amount that you elected.

00:05:13 Mike:

Yeah. And the cost for that spousal coverage is 6.5% of the base amount that you’re insuring? Right now, we’re specifically talking about spousal coverage. That’s 6.5% of the children. We’ll talk about it a little bit, but numbers are hard to do on a podcast, so let’s give an example. Say you have a pension, that $5000 a month, and you decide to take 100%. Of that as your base amount so $5000. If something happens to you and you die, yours, your spouse is going to receive $27150 per month, so that’s 55% of the $5000. And how much that will cost you is 6.5% of the $5000 or about $325 per month. And that’ll get deducted right out of your pension each month So the other thing that’s somewhat unique around military and government pensions is they are tied to the cost of living adjustment. So each year when the cola comes around, your pension is going to go up. So is the amount your spouse would receive, and so is the cost of insuring that so percentages stay the same. But as your pension increases, so do all the other pieces of the SB.

00:06:44 Amy:

Exactly. And Mike alluded to the idea that there’s coverage for children. There’s only their spouse and children coverage. And then there’s children only health coverage. So we’ve already talked a little bit about how self coverage works. Spouse and children coverage means that your spouse is the primary beneficiary. But if you pass away and your spouse passes away, then your children would receive the benefit if they’re under age 18 or under age 22 and still in college. The cost to add children or to do the child only version is based on a calculation using your age and the age of the youngest child. So we’re not going. To jump into That year it’s too complex, but it’s relatively inexpensive compared to the spouse Options.

00:07:36 Amy:

Yeah, I looked at a couple of examples and I mean we’re we’re talking. While the spouse coverage is 6.5%, the child is less than 1%, like 1/4 of a percent. So you’re talking maybe a couple dollars per month to have that coverage. So even if you think, yeah, we, we’re OK with the spouse, then definitely look at the child coverage because it’s Almost a no brainer, but you know, so you brought up a couple of good points and you know, let’s let’s talk about eligible people that you can cover so you can cover your spouse, you can cover your children, and if you have a former spouse, you can cover them. Now the one piece is you can only cover one spouse. So if you have a divorce situation and you were mandated by a court order to cover, you know a former spouse for SBP. That means if you get remarried, you will not be able to cover that new spouse because again, you can only have one and the same with children if you know you’re covering children from a previous marriage and you have, you know, additional children.

00:09:04 Mike:

This is complex and so much about the Survivor Benefit program is complex and it’s worth digging into to just ensure that everyone understands. And there’s also a possibility to provide coverage for other relatives that are closer than a first cousin. If that person relies on you financially. So again, the details are complex and the details around covering somebody else besides a spouse or children or a child are well beyond the scope of this discussion. But just know that if you’re in a situation where perhaps, let’s say a parent is Financially relying on you, then you should do some research around how Survivor benefit programs fit into your plan.

00:09:49 Amy:

And there are resources at the base that you can go to. There will be somebody that can lay out the survivor Benefit plan for you as you’re approaching retirement. Explain your options. Lay out the costs based on your project. Pay and, you know, get you totally up to speed on your specific situation and that’s the person you’re going have to go back to see to, to sign your form and have your spouse sign the form. If you do decide to take less than 100%. So the resources out there make sure you’re utilizing them to just Understand what it Looks like for you.

00:10:33 Mike:

You know, we talked about 6 1/2%. Can you just clarify, you know, how long does that go on? Is it forever, things like that?

00:10:40 Amy:

So yeah, it’s typically a 30 year payment that you’re going to make for a SBP. So you’re going to pay that 6.5% for 30 years or up to age 70, whichever occurs later. So if you come in at 18, retire at 20 years at 38, you’re going to actually be paying 32 years of SP, but you’ll be done at 70. And then you still have coverage, but you’re no longer having to make those payments. And the one other piece just highlighted here is that if Your spouse predeceases you don’t get anything back. There’s no refund of payment. That’s just part of the insurance game. But at that point, your payments will stop. So if your spouse predeceases you say you’ve been paying for 15 years and then they die first, your payments will end at that point.

00:11:44 Mike:

All, all good points. I see a lot of questions around. You know, spouses pass away, divorce situations and things like that. So as you pointed out, there’s an expert, usually in the retirement Services office of your installation. So you can ask questions there. Check out the website or get in touch with us. Back to your point, you know it’s either 30 years of payments and age 70, so once you reach 30 years of comments and age 70, then you have what’s called paid up coverage. So that means that you’re covered. You don’t have to pay your premiums anymore, but your spouse will still continue. To be eligible to receive 55% of the views that you elected when you retired, which gets into the timing of when you have to make your SBP decision.

00:12:43 Amy:

People get surprised that this comes up if they haven’t really been paying attention and know all the benefits, ins and outs of military retirement. It’s in the months approaching retirement and you can truly, you know, change your life if you start six months out and you’re like, no, we’re not going to Do it and you know, but you have until you actually retire. You know your official retirement date to make the election. But again, your service is going to want you to fill out the paperwork and get that stuff done Earlier than that, so make sure you’re taking the time to understand what all the benefits are and how they fit into your situation so you can make an informed decision.

00:13:31 Mike:

Yeah, because the decision is a big decision and the reason that it’s a big decision is one, it can be so meaningful to your family’s life if something happens to you, but also because it’s mostly an irrevocable decision. For the most part, if you opt out at retirement, you’ve opted out forever. There is no fixing it later. I know that a lot of people probably did hear about the Survivor Benefit program open season that occurred last year, so that that particular situation that open season did allow some people to reverse the decision. But these sorts of open seasons are incredibly rare, and nobody should count on seeing another one in our lifetime. So when you make the opt out decision, you need to approach it as if it is an irrevocable decision.

00:14:22 Amy:

And if you do opt in, you generally are able to reverse your decision between your second and third anniversary of military retirement. And you might also be able to opt out eventually, depending on your VA disability rating. And really, in the amount of time that you’ve had that rating, so that’s a little more complex, but you know it, there are a couple of ways to get out if you know certain criterias that.

00:14:55 Mike:

Exactly. Now I’ll just mention here quickly that there was a recent change to SBP. That’s why there was an open season. It was a pretty major. Change so in the past, if you had elected into the Survivor Benefits program and then you passed away and you were eligible for dependency and indemnity compensation or DIC, then those DIC payments offset some of the offset, some of your survival Benefit that is no longer the case. So as of January of 2023 last year, widows will receive full survivor benefits as well as any DIC payments to which they’re entitled. So this was a huge change and that was the reason for the SBP.

00:15:46 Mike:

Yeah,  that changed the math for a lot of folks. So that was again why, you know, everyone got kind of the second bite at the apple and you know some people it made sense to opt in and you know there’s other people that I think it made sense to opt out because there’s situations that change. So yeah, but like you said, they’re very rare. Maybe once every 20-25 years. It seems like something comes around, something changes that they, you know, Congress authorizes. OK, we’ll give people a shot. But like you said, don’t plan. On it, understand. You know it’s a long term decision. And, you know, make the best one you can with the information you have at the time.

00:16:33 Amy:

Exactly. So, so far we’ve talked about why SBP exists, how the benefit works, the cost, who can be beneficiaries and the timing of the decision. There’s a few situations, just a couple of situations that are a little bit unique. So for reserve component service members there is the Reserve Component SBP. That timing is a little bit different. So reserve component SBP, that decision has to occur within 90 days of the service member receiving their twenty year loan.

If they don’t make an election during that 90 days, the default, as you might guess, is based. On what we said before. Is an immediate annuity benefit for the spouse, meaning that the spouse will receive 55% of the service member’s attention upon their death. The other two options that reservists have is to either decline to make an election until they. Start receiving their retirement pay, usually at age 60, maybe a little bit early for those who have active duty time. Or to elect a deferred annuity where the benefit would not be paid until the service member would have been Age 60. If the service member declines to make an election, they can still opt in when eligible to receive their pension. The cost for the benefit is sort of in two parts, so there’s the regular SPP premium that we talked about already. Then there’s this additional premium for coverage that is. That takes care of the time between the 20 year letter and pension eligibility.

00:18:06 Mike:

Very Complex. Another one we want to hit on is if you took the CSB redux, where you get the bonus earlier in your career and are getting a lower pension and lower index of inflation. Other nuances here. But the 55% is calculated based on and and the premium is based on the recalculation that occurs for the service member at age 62 when they kind of do a one time inflation readjustment. So just understand that and if you’re in that situation. You know, really dig in and figure out what that looks like for you. And again, the resources on base are going to be able to help you with that.

00:18:51 Amy:

Exactly so. So we’ve been through quite a lot already, a little bit more to go here if you don’t fall neatly into a category that we’ve already talked about, then it is really important to do your research. Get in touch with the experts on your installation so that you can make a really well designed or really well thought out. Now, Mike, the people that stuff really want to hear about here. How do you make this decision? What’s the best way to make this decision? So, like we said before, people have strong emotions around it and they have strong emotions about what your decision should be. So what are your thoughts on, you know, sort of how you make this decision?

00:19:34 Mike:

First of all, I I think for a lot of people. The you know kind of default decision should be to take some or all of SBP. There are some things that you should consider as definitely part of it. Some of those factors let’s head them. So the age of both you and your spouse and the, you know, the health of both you and your spouse  are key factors in determining if you think you need this now, nobody can predict even if somebody’s in better health. You know there’s a proverbial hit by the bus that can happen to anybody at any time. But those are key things. What would be the impact if you, you know, didn’t take it and you know you did shortly after retiring? For some people, if the spouse has a second career, maybe they’re covered by their own pension. It wouldn’t be a big, you know, it’d be an impact, but it wouldn’t be a huge financial impact.

Can you get outside insurance? If you have, you know if you have medical issues to get insurance in your 40s, you know, late 30s forties. They’re going to look at all that and they’re going to look at your health and the rates may not be that. What’s your insurability and how much is that going to cost you? How much do you have in assets? If you have saved a lot of money and invested well and you’ve got a huge portfolio that you can live off of or your spouse can live off of. Those are things that need to go in and then you know, what do you expect or earn in retirement? And how long do you expect to live? If you’re going to, you know, significantly increase your pay after you retire and can count on, you know, sucking a lot of that money away, maybe the insurance piece for an A, you know, term is the right decision and you’ll have enough of that.  You know, when you decide to retire at 65 or 62 that you know you, you, you and your spouse will be taken care of. So all those things are kind of the tangible factors that go into this decision. But there’s also a lot of things. That are beyond that. So Amy, what are some of those?

00:22:05 Amy:

Yeah. So in addition to sorting out the quantifiable things, the number of things, there’s some non-quantifiable considerations like how your spouse feels about the decision. You know, we started the podcast by talking about this benefit being for the family. It’s really for your spouse. So I always do. You know, talk to my clients. It’s the service members pension, but in a big way. This is the spouse’s sort of decision. So how do they feel About it. Another consideration is if you decide to decline SBP and replace it with insurance, is your spouse capable and comfortable with receiving a lump sum of life insurance money and then employing it in a way to replace your survivor benefit?  So are they comfortable with the idea of investing or you know, whether or not to work with an advisor or the ability to manage the money? And then you know, how can you be sure that even if your spouse today is very capable of managing money and you really could do really well? With a lump sum of money. How can you be sure that your spouse, after you’ve passed away, will have the wherewithal to make investment decisions? And you know, I’ve seen clients who become widows sometimes unexpectedly. And I’ll tell you that most of them were not able to meet your financial decisions for at least a period of time and some for quite a long time. You know, a year and in a lot of ways, it’s good if widows aren’t required to make a huge financial decision within a year of losing their styles. So you know, that’s a huge consideration because if your life insurance strategy that you put in place to replace Survivor benefit requires that you achieve some rate of return on that money, then you need to be really sure that there’s some plan. At Least to make sure that your widow is capable of doing whatever the plan was, or that you have, you know, a trusted person who can assist, whether it’s a family member or financial advisor or something, so that. You know your widow isn’t left making decisions at a period of, you know, intense grief at having.

00:24:25 Mike:

And one thing that research has kind of, you know, bears out that they’ve looked at retirees that have a large sum of money that they’re living off of, the ones that are happier tend to be the ones that have some kind of income stream coming in. Now, that’s not to say that you couldn’t take it. You know, leave instructions to say, take the insurance and you know, buy some type of annuity that will pay some basic amount of income to your spouse. But again, you want to think through all of that. And as you said, there’s both. Quantifiable things that you can, you know, throw in the spreadsheet and and game out and say well, what happens and are they going to be OK. But there’s also the intangible and there’s this sleep at night factor of. You know what really is the best for them? So yeah, it’s definitely a blend of the rational side and the emotional. And you know with it have those discussions and make sure it’s not just hey, we got an SBP you know. Meeting that, we got to go sign these documents and you haven’t really talked it through or thought it through fully.

00:25:48 Amy:

So you know the key takeaway of this podcast, and we’ve tried to highlight it a couple times is that their Survivor Benefit program decision is highly sensitive to your individual situation. You shouldn’t opt out because you heard that it’s expensive or that it’s silly to do anything but use life insurance instead of SBP. You shouldn’t opt in because other married people that you know have opted in. The decision should be driven by your family’s needs and your family’s preferences. Of all the financial decisions that should really be driven by your individual situation, this one is particularly personal, personal don’t be bullied into a decision. That might not be right for you, for your family, and also don’t be unplanned into a decision that might not be right for your family. This one’s important to get right and to tailor it specifically to your family.

00:26:43 Mike:

Exactly. Do your research. Make sure you discuss the decision with your spouse. Get some unbiased advice from a person who knows your situation. And just think about it and make sure you’re making the right decision for you.

00:27:01 Amy: 

Couldn’t have said it any better myself, Mike. And with that, I think we can wrap up the show.

00:27:06 Amy:

Thanks, Amy. We’ll look forward to talking again in a couple of weeks.

00:27:10 Mike:

Sounds great. See you then.