The Survivor Benefit Plan: It’s Not Just About The Math
TLDNR: The Survivor Benefit Plan (SBP) is not an investment. It’s guaranteed, inflation-adjusted survivor income. If your spouse doesn’t want to manage investments during grief, or ever, the math alone is the wrong evaluation lens for whether you should decline the SBP.
I am a member of several military finance-focused Facebook groups. The topic of the SBP and whether one might elect out, is a topic that comes up at least 2-3 times per week it seems. Each time, my response is generally the same and so I decided to pack it into this article as an easy way to quickly give my experiential thoughts on the topic. The decision to elect out of the SBP is a deeply personal decision that demands a meaningful conversation between partners with the end in mind – it’s not simply about the premium.
When military pre-retirees talk about the SBP, the conversation often turns into a debate about rates of return, opportunity cost, and whether someone could do better by buying term life insurance and investing the rest. Those are familiar arguments, especially among people who are comfortable with finances. But the SBP is not an investment product, and it is not designed to win a spreadsheet competition – although it could. The real problem I’ve seen, experienced, and been guilty of myself, is that the SBP discussion is often led by someone who will never personally collect the benefit. That alone should change how the decision is evaluated.
How the SBP Actually Works
The SBP allows a military retiree to ensure that a surviving spouse or other eligible beneficiary receives a monthly payment after the retiree’s death. For a surviving spouse, premiums are 6.5% of the base amount chosen and the benefit is 55% of that same base amount. The maximum base amount is your gross monthly retirement pay, but you can choose a lower base amount. The premium is deducted from retired pay for a period of 30 years (360 payments) and age 70, or earlier if the SBP benefit begins due to the retiree’s death. The benefit is paid for the survivor’s lifetime. Both the premium and the benefit receive annual cost-of-living adjustments, preserving the purchasing power of the survivor income. In that context, the SBP does one thing very well; It replaces a portion of retired pay with a predictable, inflation adjusted monthly income that continues for as long as the survivor lives.
Making and Living With The SBP Decision – Two Different Parts of the Same Puzzle
Since the retiree is often the first one made aware of the SBP decision, whether through peers or a transition class, in most cases they are also the ones to form the first thoughts about the amount of the premium and whether it’s worth it. Whether the premium is worth it, could be based on legitimate evaluation, spreadsheets, and math. It could also be framed by the same person who told them about SBP, (e.g. it’s a rip-off), without much thought.
In the initial decision-making process, the spouse is often in a very different position, maybe unaware of the SBP and the benefits it could provide. Hence, the many Facebook posts asking questions about what other people think.
Here’s the problem; while the active duty member is highly influential in making this decision, it’s the surviving spouse that must live with the decision. Active duty spouses – this is the part worth slowing down for. You don’t like the premiums and think you could do better with a term policy and investing, which might be completely accurate. But what if your spouse doesn’t want to manage the investments? What if they don’t enjoy financial decision making? They may not want to think about withdrawal strategies, asset allocation, or market cycles, especially during a period of grief. When you pass, you’re out of the investment business and your spouse is left to “carry out the plan of the day”. The surviving spouse will be presented with a large insurance check if you bought a life insurance policy that is still in-force, and your investments will be rolled over assuming you’ve added your spouse as a beneficiary or there are no probate challenges. With a check and your investments, through their grief, they will have to work against the very fabric of their being to figure out how to make this money last their lifetime. Sure, they could reach out and find a financial advisor to help, but without a prior relationship in place, why put that extra burden on them during a highly emotional time?
The “Term and Invest the Rest” Argument Misses the Point
The most common objection to SBP is the idea that a retiree can buy term life insurance and invest the difference for a higher return. That argument assumes several things that may not hold true for the survivor.
First, it optimizes for the wrong person. The retiree may enjoy investing. The survivor may simply want reliable income without decisions.
Second, a portfolio requires management. SBP does not. Investments require ongoing judgment about markets, withdrawals, and risk tolerance. SBP requires none of that.
Third, emotional comfort has value. A theoretically higher return does not help if the survivor feels anxious, overwhelmed, or unsure about every financial decision. Grief is not a good time to become a portfolio manager.
Fourth, the SBP has the most value the closer you are to your military retirement - the exact time when your investments may have a lower value. While rare, it’s certainly not unheard of that a retiree passes in the years immediately following their military retirement. I’ve never heard of a single surviving spouse who regretted their SBP election, but I have surely heard of a few widows who did not understand that their decision to decline SBP meant that they would no longer receive any military pension for their 20+ years of service when their retiree suddenly passed. I’ve also heard a few stories where their term policy wasn’t in place either.
When SBP May Not Be the Right Choice
This article provides an alternative perspective on the common thought that the retiree will save the premium, invest it, and buy a term policy, while not having a real conversation about their spouse’s thoughts on that plan. But what if your spouse is totally and legitimately onboard with that plan? They really do like investing and could plan for a lump sum insurance payout? Then this becomes a completely different conversation. The point here is that you are both thinking through the outcomes, understanding the consequences, and on board, before declining the SBP.
Another situation where the SBP may not be the right choice, is in the case of dual military retirees. In dual-retiree households, the surviving spouse retains their own pension, healthcare, and benefits, which changes the income-replacement equation significantly. While declining the SBP would mean a sudden reduction of 50% of the survivor’s income, it could also mean that there is enough of a reduction in expenses, that the SBP may not be worth it. Again, having these discussions and being genuine and honest about each other’s concerns is critical.
SBP Compared to Civilian Annuities
Alright, you’ve had the discussion and you decided you want an annuity, but you’d like to shop around to compare prices and benefits - I would encourage you to do exactly that! The SBP functions much like a lifetime annuity, but with features that are difficult or expensive to replicate in the civilian market.
Civilian annuities are typically underwritten based on health. The SBP is not.
Inflation protection in civilian annuities is rare and costly. The SBP includes automatic cost of living adjustments.
Civilian annuities rely on the financial strength of an insurance company. The SBP is backed by the federal government.
You pay for everything included in a civilian annuity. The SBP is subsidized by the federal government.
I’ve tried to find a comparable product but alas, have been unsuccessful. I would invite you to contact an insurance broker to see if you can find a better deal. If you find one, please contact me!
Final Thoughts
Believe it or not, the intent of this article was not to convince anyone for or against the SBP. The intent was to change the lens of evaluation and spark an honest conversation between a retiree and their spouse about what would be best for the surviving spouse, even if the numbers don’t seem optimal. The SBP election conversation is a big deal with very real and significant consequences. It warrants a hard conversation. It’s not fear-mongering, it’s the point.
Disclaimer: This article is provided for educational, general information, and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Read the full disclosure.