Survivor Benefit Plan (SBP) for Retiring Veterans: Pros and Cons

Abstract

The Survivor Benefit Plan (SBP) is a crucial financial tool for retiring veterans, designed to provide a guaranteed income to beneficiaries after the retiree's death. This overview outlines the advantages and disadvantages of the SBP to help veterans make informed decisions about retirement planning. By understanding the benefits and potential drawbacks, retirees can better assess whether the SBP aligns with their financial goals and family needs.

Advantages of the Survivor Benefit Plan

Guaranteed Income for Beneficiaries

One of the primary advantages of the SBP is that it ensures a guaranteed income for your designated beneficiary. Eligible beneficiaries will receive 55 percent of the retiree's elected amount of coverage, providing financial security during a challenging time.

Inflation-Indexed Benefits

SBP benefits are designed to keep pace with inflation. The coverage and costs are not influenced by the retiree's age or health status, which is a significant advantage over many private life insurance policies. Whether you retire at 45 or 80, your or your spouse's age or health will not affect the program's cost. Additionally, the SBP annuity is protected against inflation, with annual adjustments based on the Consumer Price Index.

Pre-Tax Payroll Deductions

For most retirees, SBP premiums are deducted from gross pay before federal income tax is calculated. This feature reduces your total taxable income, making the SBP a more financially advantageous option during retirement.

Source: Defense Finance and Accounting Service (DFAS) — Survivor Benefit Plan (SBP)

Advantages at a Glance

• Guaranteed Income: Ensures a guaranteed income for your designated beneficiary, providing financial security.
• Inflation-Indexed Benefits: Benefits are designed to keep pace with inflation, with annual adjustments based on the Consumer Price Index.
• Pre-Tax Payroll Deductions: Premiums are deducted from gross pay before federal income tax is calculated, reducing taxable income.

Disadvantages of the Survivor Benefit Plan

 

Monthly Deductions

Retirees pay a percentage of their gross retired pay

Cost Percentage

Deductions can reach up to 6.5 percent of gross retired pay

Break-Even Point

Beneficiary needs to receive payments for seven months for every five years of premiums

Weighing Benefits

Retirees must consider the cost against the benefits

 

Difficulty in Changing Elections

Once you enroll in the SBP, altering your election can be challenging. If you decide not to cover your eligible spouse or children at retirement, it may be difficult to include them later. This limitation can lead to regrets if your family situation changes, making it crucial to carefully consider your options at the time of retirement.

Understanding SBP Costs

• Cost Percentage: Retirees pay a percentage of their gross retired pay.
• Monthly Deductions: Deductions can reach up to 6.5 percent of gross retired pay.
• Break-Even Point: A beneficiary needs to receive payments for seven months for every five years of premiums.
• Weighing Benefits: Retirees must consider the cost against the benefits.

Source: Defense Finance and Accounting Service (DFAS) — Survivor Benefit Plan (SBP)

Conclusion

The Survivor Benefit Plan (SBP) can be a powerful tool, especially with its guaranteed income and built-in inflation protection. But like most things, it comes with trade-offs, particularly around cost and flexibility.

There's no one-size-fits-all answer. It really depends on how everything fits together over the long term.

If it's something you've been thinking about and want a second perspective, please click the link below or book a complimentary financial review at https://calendly.com/careypeekstok .

Learn more: Carey Peekstok | Bay Capital Advisors 

Source: U.S. Department of Veterans Affairs (VA) and Defense Finance and Accounting Service (DFAS) — Survivor Benefit Plan (SBP)