Military families getting ready to retire after 20-plus years have a lot on their plate as they transition to civilian life. What's up next on the career front? Where will they land location-wise? How will the kids cope? With all that going on, it's easy to understand how making a sound decision as it relates to the Survivor Benefit Plan could tumble down the list of priorities. Don't let that happen, and give the SBP decision the attention it deserves.
This important program allows retirees to protect up to 55% of their retirement income for their loved ones. If you're still serving and retirement-eligible, you are fully covered by SBP at no cost. However, when you retire, you will have to decide whether you want to sign up and pay for the protection.
At USAA, we believe that most retirees will be best served by signing up for full coverage, covering their entire retirement check. Of course, this decision is part of your overall financial plan, so there are exceptions. Heck, you may have won the lottery last month or, perhaps, other factors diminish the importance of SBP's protection.
If you are in the decision window, here are five factors to consider.
1. SBP Provides a Lot of Protection.
This is where most people doing an independent analysis of SBP swing and miss. They undervalue the protection the program provides and just how costly it is to replicate. For example, let's say that the military member's monthly retirement check was $5,800. When you look at what it would cost to replace the income it would provide to the beneficiary -- initially, $3,190 a month -- without SBP, the number, depending on your assumptions, would be around $1 million in permanent life insurance. That's a lot of protection.
2. SBP Benefits Are Inflation-Adjusted.
One reason the SBP benefit is so valuable is that it increases each year based on inflation. These days, the idea of inflation adjustments resonates a bit more with people. But even with moderate 2.5% inflation increases, that initial benefit of $3,190 would increase to more than $80,000 a year in 30 years when the beneficiary would likely be in his or her late 60s or early 70s. Inflation-adjusted income streams provide real peace of mind.
3. SBP Is Subsidized and Reasonable.
In the many conversations I've had regarding SBP, this is the one topic that consistently comes up as what I would call a roadblock. In the scenario I've been using here, the initial cost for full SBP coverage for the spouse would be $377 a month. That's not peanuts. However, it's likely a fraction of what it would cost to buy $1 million of permanent life insurance. It's also important to remember that SBP is paid for on a pretax basis. It's a bit different for those serving in the National Guard and reserve, but it's still critical to understand your RC-SBP options and costs. If you are looking at other options and comparing costs, don't forget that if you don't take SBP, you won't simply have the full 6.5% contribution at your disposal: The tax hit may leave you with a lot less.
4. SBP Lasts a Lifetime.
This is why I think you may be creating a gap if you compare SBP to term life insurance. It's my belief that if you're going to try to recreate SBP protection with an insurance product, it should be a permanent product. In most cases, I don't think the insurance will compare favorably, but it does provide additional features and benefits.
5. SBP Is Easy.
Can you put a price tag on "easy?" Probably not, but it's something that's always on my mind in discussions or planning for surviving the loss of your spouse. Just sign up without any qualification or exams. After that, rest easy knowing the security and sense of well-being that a monthly "paycheck" would provide to a survivor without any management or decisions required. All this is just another element of the "value" SBP provides.
If your family is facing the SBP decision, be deliberate, be thoughtful and, when in doubt, full coverage is a fine default.
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