Guest Blog: SBP Plans with Daniel Kopp
November 8, 2022. Ashley Agnew:
As we approach Veteran’s Day, we are reminded to be thankful for all those who have contributed their time to our military. As a member of a military family myself, I’m personally thankful to my husband for his over 20 years in the Navy but am also familiar with how confusing many of the retiree benefits can be when planning on completing the last post. Few financial planners are so well versed in assisting military families as fellow financial therapy enthusiast, fiduciary planner, and research colleague Daniel Kopp CFP ® of Wise Stewardship Financial Planning. With the holiday approaching, I thought it would be helpful to share some information to help military families in their financial planning efforts; naturally Daniel was my first stop and as always, a great resource. He shared that one of the more frequently asked questions he gets when guiding retiring military families beginning the retirement process is regarding the SBP, or Survivor Benefit Plan. Daniel lends his insight in this week’s guest blog:
A Little Help with Survivor Benefit Plans
For most military retirees, the Survivor Benefit Plan (SBP) is often the most important decision of your financial life. It can also be among the most confusing, emotional, and uncertain. In almost every case, you must make a one-time irrevocable decision that will have lasting impacts for decades. And, you have to make that decision with all the unknowns that the future holds.
This is a critical financial decision worth hundreds of thousands (potentially millions in some cases) of dollars over the course of your lifetime and that of your beneficiary!
For the military spouse though, this is more than just a financial decision. Aside from the long-term financial impact, it’s a good thing that the DoD requires spouses to sign off if the military member declines SBP. Given the career and other sacrifices that most military spouses make on behalf of their spouse’s military career, there is rightly an emotional aspect that should not be ignored. A military spouse’s investment ought to be considered as a major contribution that helped earn a military pension.
Good Help is Hard to Find
While most servicemembers and their spouses may have heard about SBP, learning about it takes on a whole new sense of urgency when it comes time for your own decision. Everyone should take advantage of the information presented in TAP, read what my friend Kate has written, do your own research with the info that DFAS and the DoD actuary provides, and talk about this with your spouse.
However, even with all of that information it can still be overwhelming. All the necessary information is available from government sources. However, when you try to research it online, it can be difficult to piece together due to how spread out the information can be. You may have heard a variety of opinions from others who already made the SBP decision and there’s a lot of opinions about which way is the best approach to making a decision.
For those that seek an outside perspective from a financial planner, unfortunately there’s not really anything comparable to SBP in the insurance industry, so it’s hard to find civilian references or financial planners that can help you determine whether it’s right for you. Instead, you may find an aggressive salesman motivated by getting a commission wanting to sell you a big insurance policy whether or not that may be the right choice for your situation.
There’s Got to be a Better Way
I saw the sparse and scattered information from DFAS, DoD Office of the Actuary, TAP class, and saw other people trying to fill the education gap to help empower good decisions. Ultimately, I decided to do something about this.
I’ve created a custom Survivor Benefit Plan Analysis to help you look at your unique situation, evaluate all the financial and emotional variables, act as an impartial third party to help spouses talk and think through their feelings together, and ultimately empower you to make the best decision for your future.
Evaluating SBP Considerations
For those soon-to-be retirees cramming on learning about SBP, here are some of the major pros and cons:
- Provides a guaranteed monthly payout for the lifetime of the beneficiary
- Indexed for inflation. This means that the payout will rise with the cost of living adjustment (COLA) ensuring that beneficiaries will maintain their purchasing power every year
- Provides longevity insurance to your beneficiary – you cannot outlive SBP coverage (particularly important consideration as we continue to live longer and longer)
- Predictable, and therefore, can be used when determining cash flow in financial planning.
- Automatic coverage for all military retirees with no medical or eligibility requirements
- Once in ‘paid-up’ status, no longer require payments. Paid-up status occurs after 30 years (360 months) of premium payments AND reaching age 70. There may be circumstances where a retiree pays for 30 years and has to keep making payments because they have not yet reached age 70.
- Once selected, SBP premiums are automatically paid from pension (or VA compensation by filing Form 2891 through DFAS)
- Much cheaper cost than comparable commercial annuity options due to the DoD paying part of the cost
- Payments made from pre-tax income reduce your current federal income tax liability
- No access to principal
- If the beneficiary dies before the retiree, there is no payment and no refunds on SBP payments
- With only a few circumstances, the decision about SBP is final
- Payments stop upon death of the beneficiary. In most cases, this is the spouse, so when the spouse dies, there’s no residual benefit for adult children (except in special needs cases, in which the child can become the beneficiary in certain qualifying circumstances)
- SBP benefits are taxable unlike life insurance which is not taxed
- If beneficiary predeceases retiree and there is no other qualified beneficiary, coverage stops unless retiree remarries
- Beneficiary SBP payments can end if they remarry
- May not be a good choice if the servicemember is likely to outlive the spouse
- Can be more expensive than required term life insurance coverage
- Doesn’t allow as much flexibility with multiple beneficiary options in your estate planning considerations
- The SBP-DIC Offset
When weighing the pros and cons as they relate to your financial plan, you will also want to consider the following key factors with your financial professional:
- Examining income differences and needs with military transition to civilian careers. Exploring career what-ifs for both spouses potentially seeking new employment opportunities
- Comparing SBP coverage to term or permanent life insurance coverage over your lifetimes. Determining insurable needs, income replacement, and final expenses.
- Calculating your timeline to reaching financial independence/full retirement based on your past and future savings, with or without SBP
- Assessing longevity risk (the chance that you might live longer than your money will last)
- Increasing healthcare costs and expected longevity
Working with a fiduciary planner or advisor can provide a neutral place for these difficult discussions using the guidance of an impartial third party for both spouses to talk about and share their feelings.
The most important thing to understand is that all aspects of the SBP decision are made when the servicemember retires. With very few exceptions, any election made at retirement is irrevocable, so choose wisely. If married (or if directed by a divorce decree), the spouse is required to agree with the service member’s SBP choice to elect anything less than full SBP. Waiting to research and make the decision at the last minute makes a stressful decision even more difficult.
Daniel’s complete thoughts on the topic and how he helps clients navigate the process can be read in his original post “A Little Help with Survivor Benefit Plans” by clicking here or visiting wisestewardshipfp.com.