Military Survivor Benefit Plan vs. Life Insurance

For a retiring member of the military, deciding between the survivor benefit plan and life insurance can be very difficult. On the one hand, knowing that your spouse has a fixed amount of money coming in every month after you die can be very reassuring. 

Jump ahead to these sections:

• Overview: Survivor Benefit Plan vs. Life Insurance
• Costs: Survivor Benefit Plan vs. Life Insurance 
• How Payouts Work: Survivor Benefit Plan vs. Life Insurance
• Should You Use the Survivor Benefit Plan, Life Insurance, or Both?

On the other hand, knowing that they’ll receive a tax-free, lump sum of cash can provide you with peace of mind.

How do you decide? This article is going to help you do just that. We’ll review the survivor benefit plan, how it compares to life insurance, and which might be best for your situation.

Overview: Survivor Benefit Plan vs. Life Insurance

For you to ultimately decide which one is the best choice for you, let’s first examine some of the qualities of each.

Survivor benefit plan

Survivor benefit plans (SBPs) are a type of annuity offered to former military members and some federal government employees. The plans only begin paying a surviving spouse a specified benefit when the insured person dies.

When you retire from the military, you’re required to choose your SBP coverage. You can’t decline or reduce it from the full coverage amount without your spouse’s consent and notarized signature.

SBP is paid by a monthly premium deducted from your retirement check. The higher the monthly amount your surviving spouse will be receiving, the higher the monthly premium will be. The highest your SBP can be is 55% of your retirement pay.

Life insurance

Life insurance is a contract you enter into with an insurance company that obligates you to pay a monthly premium to the insurer. The contract obligates them to pay a lump sum of money to your beneficiary when you die.

There are two types of life insurance to choose from: permanent life insurance and term life insurance. 

• Term life insurance is the lowest-cost life insurance available because it only offers the life insurance component, not the cash value benefit. Term life has been referred to as “temporary insurance” because it only pays a death benefit during a fixed term or period of time (one, five, ten, twenty, or thirty years). After the term is over, the policy expires without value.
• Permanent life insurance pays a death benefit to your beneficiary when you die, and it has a savings component called the “cash value,” which the policy owner can access while they’re living. It protects you your entire life as long as you pay the premiums on time; it never expires without value.

Summary of survivor benefit plans vs. life insurance

Here’s a quick-and-easy summary of how survivor benefit plans stack up to life insurance (courtesy of Finder): 

Costs: Survivor Benefit Plan vs. Life Insurance 

Another key difference between survivor benefit plans and life insurance policies is the cost. Let’s look at how those costs compare.  

SBP costs (premiums)

The SBP premiums for spouse coverage are (courtesy of the U.S. Department of Defense):

1. 6.5% of your chosen base amount; or if less
2. 2.5% of the first $725.00 of the elected base amount (referred to hereafter as the "threshold amount"), plus 10% of the remaining base amount.

The threshold amount was $725.00 as of January 1, 2010. For new retirees, the threshold amount increases simultaneously and by the same percentage as future active duty basic pay. For existing SBP-electing retirees, it increases with future COLAs.

If you became a member of a uniformed service on or after March 1, 1990, and you are retiring for length of service (not for disability), and you are not retiring under reserve retirement, SBP costs will be calculated only under the formula in (1) above. Otherwise, it will be the lesser of (1) or (2).

The following table shows the costs associated with several "base amount" options and your spouse's benefits based on these options.

SBP premiums are calculated solely on the base amount the service member has selected. Age, gender, and health status are not factors in the premium calculation for SBP.

Life insurance costs (premiums)

Calculating life insurance premiums is much more complex than it is for SBP. Premiums are primarily based on life expectancy and other factors, including your age, health history, gender, and whether you’re a smoker.

Generally, the healthier you are, the lower your premiums will be. That’s because the life insurance company calculates that you’ll be paying them for the cost of your life insurance longer than someone with pre-existing medical conditions since your life expectancy is longer.

The type of life insurance you buy will also make a significant difference in the monthly premium you pay.

Term life insurance is the least expensive you’ll find because it only lasts a set term of years and then expires. It is purely life insurance without any cash value.

Permanent life insurance, particularly whole life insurance, is much more expensive than term life insurance because the coverage lasts a lifetime, and it accumulates cash value, which you can use while you’re living.

Here are some premium comparisons based on different factors (data courtesy of NerdWallet):

• Average cost of life insurance by age and gender

These annual life insurance rates are based on a $500,000, 20-year term life insurance policy for super preferred applicants.

• Average cost of life insurance by policy type

These annual life insurance rates are based on a $500,000 policy for super preferred applicants.

• Average cost of life insurance by health

These annual life insurance rates are based on a $500,000, 20-year term life policy.

• Average cost of life insurance by term length 

These annual life insurance rates are based on a $500,000 term life policy for a 40-year-old applicant in the super preferred class.

How Payouts Work: Survivor Benefit Plan vs. Life Insurance

There is also a significant difference in how payouts work between SBPs and life insurance. Let’s start first with SBPs.

Who’s eligible for an SBP payout (and how do they receive it)?

If you’re in the military and you’re preparing for retirement, you’ll be required to decide who will receive the SBP payout when you die. You have five choices:

1. Spouse only. The most common election is the spouse-only election. If you have an eligible spouse and choose anything less than the full benefit, you’ll need to get their notarized signature for your election to be considered valid. You can select coverage for a spouse or a former spouse, but not both. Former spouses are not automatically enrolled. 
2. Spouse and children. The spouse is the primary beneficiary, and the children receive the benefit only if the spouse loses eligibility. Children are covered in equal shares as long as they are unmarried, legal dependents under the age of 18, or up to age 22 if they’re enrolled in an accredited college or university.
3. Children only. You can choose to have only your dependent children receive the payout. It will be divided into equal shares among the eligible children.
4. A former spouse or former spouse and children. This election is for a former spouse or children, similar to the spouse and children described above. Children from the former marriage are the only children that can receive a benefit if that election is made.
5. A person with insurable interest. This can be someone who has a legitimate insurable interest, such as a sister or brother, a child beyond eligibility age, or a business partner.

The beneficiary of your SBP will receive a monthly payment for the rest of their life. It’s an annuity, which is a series of fixed payments, not a life insurance policy, which is a lump sum. 

The payment is taxable since the deduction from your retirement check was made with pre-tax dollars, so you got your tax break up front.

Who’s eligible for a life insurance payout (and how do they receive it)?

Anyone you designate can be named as the beneficiary of your life insurance policy, as long as they have an insurable interest. Dependent children named as beneficiaries on your policy won’t be removed when they are no longer legally your dependent, if you so choose.

The payout is most often in a lump sum, though it can be spread out over time if a trust is the policy’s beneficiary and the terms of the trust require the payout to be made in installments. This is often done for the protection of minor children.

Because the life insurance premiums were paid with after-tax dollars, the payout of a life insurance policy goes to the beneficiary tax-free.

Should You Use the Survivor Benefit Plan, Life Insurance, or Both?

Your situation is unique, so it’s hard to tell you what your best option is. However, here is a rule of thumb:

Choose the SBP when:

• Your spouse doesn’t have any other retirement funds to pull from
• Your spouse is the same age as you or younger, and they’re in good health

Choose life insurance when:

• You want to name other people besides your wife to receive the death benefit
• Your spouse is older than you or is not in good health
• You want to ensure an ample benefit amount

Run the Numbers

A great resource to help you decide which route is best for you is a CPA or a financial planner. They often have specialized software that can help you see which option would best benefit you and your beneficiary. 

Sources: 

1. Absher, Jim. “The Survivor Benefit Plan Explained.” Survivor Benefits, Military.com, 11 November 2020. military.com.
2. Fluekiger, Andrew. “Survivor Benefit Plans vs. Life Insurance.” Finder, 8 March, 2021. finder.com.
3. Rose, Georgia. “Average Life Insurance Rates For 2021.” Insurance, Nerd Wallet, 21 March 2021. nerdwallet.com.
4. “Military Compensation.” U.S. Dept of Defense, 2021. militarypay.defense.gov.