By Hank Coleman
Posted in Articles
The day a member of the military leaves service, or even the very day they die if they are unfortunately killed in combat, their paycheck ends. The same is true in military retirement. This means that the military member’s spouse will see an immediate drop in their retirement income or a complete loss of retirement income if they have no other source.
This is unless, of course, they have signed up for the Survivor Benefit Plan or SBP. The Survivor Benefit Plan can protect your loved one from some of the hardships caused by the loss of retirement income.
The Survivor Benefit Plan was created by Congress in 1972 and is the only way survivors can receive any portion of a military member’s retired pay. Despite commonly calling military retirement a pension, it is actually a pay classification such as an active duty military member’s basic pay. It is called retired pay, and retired pay stops when the military member dies. The Survivor Benefit Plan (SBP) helps make up for a portion of the lost retirement pay income, and without it, retirement pay stops on the date of the retiree’s death.
SBP pays eligible survivors an inflation-adjusted monthly income in the form of an annuity after the retiree’s death. SBP is an insurance policy that retiring military members and their spouses elect to pay for at the time of retirement in order to protect the spouse from economic hardship due to the loss of the retirement pay in the event the retiree dies.
Basic SBP benefits for a spouse pay a monthly stipend equal to 55 percent of the military member’s retired pay. Children may also be eligible for SBP benefits if additional option is requested at the time of retirement, but children will only receive benefits should the military retiree die while the children are still considered a dependent.
Since the Survivor Benefit Plan is a form of insurance that will pay survivors in the form of an annuity upon the military member’s death, the service member must pay an insurance premium for SBP starting at the time of retirement. The insurance premium coverage is taken out of your retirement check by reducing the amount of retired pay you receive every month.
One benefit of reducing the retired pay is that a smaller portion of your take-home paycheck or pension will be considered income and taxed. Insurance premiums withheld from your retirement check are not counted as income and subsequently not taxed.
The SBP is also partially funded by the federal government. So, the average insurance premiums are well below the actual cost for the program. Certified Financial Planner and USAA Spokeswoman, June Walbert, agrees: “SBPs the deal of the century! It’s a smart and caring way to take care of a spouse who doesn’t have a pension of their own. Premiums paid with pre-tax dollars and cost of living adjustments make it hard to beat.”
When a military member nears retirement, there are a slew of mandatory briefings that he or she has to attend to prepare for the transition of leaving the military. These required briefings include things like understanding your Veterans Affairs benefits, medical screenings and many others benefits that must be understood during this tough transition.
However, when it comes to the Survivor Benefit Plan, the military requires your spouse to attend the briefing as well as the uniformed member. The military member must elect to not be included in the Survivor Benefit Plan and his or her spouse must also be notified. The decision whether to participate or not in the SBP is that serious with permanent repercussions.
Many financial planners tout the many great advantages of the Survivor Benefit Plan. SBP protects a surviving spouse with a low cost annuity which has a cost of living adjustment should the military retiree die first. The Survivor Benefit Plan protects your heirs from the unexpected hardship caused by the loss of retirement income after death. It is an important retirement benefit that spouses should consider.
Hank Coleman is a Captain in the U.S. Army, freelance writer, and the founder of personal finance sites such as Military Money Might. His writing has been featured on The Motley Fool, Military.com, and many others. You can follow him on Twitter at @HankColeman.