SBP or Life Insurance?

If you are nearing retirement you may be considering purchasing life insurance instead of taking the full survivor benefit plan (SBP). In making this choice you might be wondering how much coverage you need to make up the difference. It's an important question, so approach the subject carefully.

First, consider what you're comparing. The SBP provides the spouse of a military retiree a guaranteed income for life. Period. The amount of the benefit is based of 55% of the "base amount."

The SBP has some attractive features, including a cost of living allowance, pre-tax deductions to pay for the cost of the benefit, and a program that is, in fact, subsidized by the US Government.

So, to state a simple example, if the base amount is $4,000, the spouse would be assured of an income of $2,200 per month, or annual benefit of $26,400 per year.

The amount of life insurance you need to equal this benefit is entirely dependent on the age of the spouse when they begin taking their benefit. Because the decision to take the SBP must be made in the first year of retirement, you have to assume the worst case scenario...that the spouse begins to take their benefit immediately. Assuming that the spouse is 40 years old, and female, she will need income for 41 years. The present value of this stream of payments, assuming a 3% rate of inflation is $618,000. This amount is padded a bit because your spouse will be eligible to begin taking a reduced Social Security benefit at age 60 and the full benefit at age 67.

Still, this figure does give you a point of reference to consider when you develop your options. If, indeed you decide to reject the SBP, purchase term life insurance, and invest the difference with the goal to be self-insured, then you can compute what your investment might be worth.

The SBP premium, in our earlier example, would be $260 each month. If the life insurance costs $60/mo for 20-year term, then you'd have $200 to invest. If that investment were invested in the SBP equivalent of Treasury Bills, the investment would be worth about $62,000. If at that time the spouse needed to begin taking benefits, assuming a 4% distribution, she would only be able to take $200 per month! Even with a Social Security Benefit, the veterans spouse's ability to maintain her current lifestyle would be in serious doubt.

Could you do better than T-Bills in your investment? Sure. But remember you are comparing two alternatives with very different levels of risk. By comparing the interest rates at the T-Bill rate you get a better understanding of the risk adjusted value of the Survivor Benefit Plan.