Survivor Benefit Plan vs Life Insurance: Which is Best?

Today, you will come across many financial plans that aim to secure your financial well-being and that of your beneficiaries as you plan to retire. Some of these plans are specific to people in particular careers, while others are open to anyone willing to meet the terms and conditions.

However, not all these plans are suitable for you as they have their excellent and faulty sides. Do not be tempted to sign up for any program without digging deep into the fine print, as here is where the downsides are.

In this piece, we will break down two plans and see how they fare against each other to help you select the most beneficial one for your situation.

Main Differences Between Survivor Benefit Plan Vs Life Insurance

The main differences between Survivor Benefit Plan Vs Life Insurance are:

  • Survivor Benefit Plan is a plan for the survivors of retired servicemen, whereas life insurance is a collection of policies open to anyone.
  • Survivor Benefit Plan pays out a fixed monthly annuity to the survivors of ex-military personnel, whereas life insurance pays out a lump sum to the beneficiaries of the insured when they pass away
  • Survivor Benefit Plan benefits are adjusted to cater for increased cost of living, whereas life insurance is not adjusted

Overview

The Survivor Benefits Plan was created to give a steady income source for the survivors of military retirees. If an army retiree opts to take the SBP, their spouse or any other eligible survivor will qualify to receive 55% of their pay after the retiree passes away.

At its core, the SBP is a type of life insurance and annuity. Unlike most life covers; it pays out a portion (55%) of the member’s retirement every month until the survivor is no longer eligible. It is meant to give financial support if a military member passes away before their spouse.

However, it can significantly impact one’s quality of life, and retirees need to assess their options and other factors before signing up for one.

Life insurance is an umbrella term for a group of policies that guarantees that the insurer pays a sum of money to the beneficiaries when the policyholder dies. This is done in exchange for premiums paid by policyholders during their lifetime. Two common types of life insurance are term and permanent.

These two are further divided into subcategories, but the underlying principles still hold. All these life insurance covers differ by several things such as timeframe, benefits to beneficiaries, and other terms.

How Do They Work?

Survivor Benefit Plan

Survivor Benefit Plan

An SBP allows a military retiree to ensure, after death, a continuous lifetime annuity to qualified dependents. This annuity is calculated based on a percentage of retired pay and is paid in inflation-adjusted monthly income.

When a military member retires from service, they have to sign up for an SBP and pay premiums. These premiums are deducted from their gross retired pay, so they do not have to come out-of-pocket. They are not counted as income, thus less tax, and out-of-pocket costs.

The government partially funds this plan by contributing to the premium and supporting the operational costs of running the SBP program. As a result, the net premiums deducted from the retiree’s pay are way low than the typical ones charged for similar policies.

A retiree can elect to have less than the maximum 55% of members’ retired pay. Eligible children can be covered by the SBP, either independently or under a spouse.

If children are included under a spouse, they will only receive the benefits if they die or become ineligible. Coverage for children is inexpensive since they will only receive benefits while they are eligible.

If the retiree has no spouse, they can include a former spouse or a party with an insurable interest, for instance, a parent or business partner.

Life Insurance

Life Insurance

Since life insurance is a general term, you must go through a few steps before nailing down the right policy for you. These policies are suitable for working adults with beneficiaries and would not want to leave them in a compromising financial position if anything terrible happens to them.

First, you need to establish the amount of coverage you need as there is no cap. This is calculated based on your prevailing situation, for instance, how old your children are, your spouse’s employment status, and any other investment you might have. In simple terms, the more your family depends on you, the more life insurance you should buy.

Term life insurance works on a set period, as the name suggests. Here, you decide to take life insurance for a certain period, say ten years. It has no value other than a payout to your beneficiaries if something terrible happens to you.

If the policy expires after ten years and you are still alive, it will be nullified, and you will have to buy another one. Some common term life insurance policies include level term policy, yearly renewable term policy, and decreasing term policy.

Permanent life insurance does not expire, and you are locked into it for the rest of your life as long as you continue paying the premiums. These policies have additional value beyond your beneficiaries’ payout if you die as they can be used as an investment.

The policyholder can borrow funds against this policy or even withdraw the funds if the terms and conditions permit. Examples of permanent life insurance include variable universal life insurance, whole life insurance, and universal life insurance.

The backbone of any life insurance policy is the payout to your beneficiaries if you pass away. All the other policies mentioned here are variations of that since they have additional features that might make them attractive. Others have limited features that make them affordable to people.

Why Should You Consider SBP?

Survivor Benefit Plan

Do not make the mistake of analyzing SBP or any other life insurance plan in isolation. All these plans can be good or bad for you, depending on the situation.

Looking at SBP from a shallow perspective, it is better than most commercial annuity products. One of the risks of these commercial annuity products is that it might be too late to build a solid annuity profile by the time you retire. If you start at this time, you might be overwhelmed before you accrue a reasonable amount that will take care of your dependents.

One thing you should be clear about with SBPs is the cost. You should not degrade your quality of life to secure the future of your dependents. It would be best if you struck a balance between the two, and here is where the cost comes into play.

The cost of SBP is capped at 6.5% of your retired pay, but you could opt to contribute less. This covers the base retirement pay and does not account for any VA disability compensation and any other offsets that might affect retirees’ income while living.

If you receive $1000 per month in retired pay, you will contribute $65 per month for SBP, and your spouse will receive $550 per month. You will find various cost calculators and ensure that you compare the contributions for SBP and a similar life insurance policy before picking one.

Another reason that makes SBP attractive is how it protects the survivors against financial security loss from outliving the benefit. SBPs pay out benefits to the survivors for the rest of their lives. Other annuities will pay the survivors for a fixed time, but SBPs will do this until they are no longer eligible.

Inflation is one thing that can make an SBP attractive. It is substantial financial uncertainty as you might sign up for the survivor to receive a specific amount, only to find that this money is not enough to sustain them due to the increased cost of living.

Inflation erodes the value of fixed incomes, making them less worthy as time goes by. Very few annuities protect you against inflation the way SBPs do.

Why Should You Consider Life Insurance?

Life Insurance

Life insurance is well known, and you will find several service providers offering multiple policies. The main reason why you should pick life insurance is that it gives you a lot of flexibility. SBPs are rigid plans meant for ex-military people, and the rest are not eligible for the program.

Besides, there are numerous types of life insurance policies stemming from the two main ones; permanent and term life insurance. This is a plus since you can carefully analyze the features of all these types and select one that meets your needs and budget.

For instance, a term insurance policy is the cheapest life cover you can get, and if you do not want to strain your current financial situation, this might be the best option. You can get policies that require you to give premiums ranging between $20 and $50 per month.

If you need the flexibility to find a life insurance cover aligned with your needs, go for life insurance.

Life insurance is available at any age, and you do not have to retire before getting a policy. It would help if you bought a suitable life insurance policy while you are young so that you have enough time to build solid cash value-assuming you select a policy that lets you do this.

If you build sufficient cash value, even if you work in the military, you might not be required to take up an SBP since the amount accrued will be enough to take care of your survivors when you pass away.

Insurance companies are approaching a customer-centric approach to how they design their products, and we are seeing custom insurance plans that cater to people’s needs. As a result, you can always talk with your insurance service provider of choice and explain your needs for them to come up with a suitable plan for you.

The Good and Bad

Life Insurance

Pros of SBP

  • Benefits are guaranteed for the lifetime of the survivor
  • Benefits are adjusted to cater for inflation, keeping their value the same
  • It does not require background checks and medical tests
  • Premiums are paid pretax, which reduces your taxable income
  • The child only cover is very cheap

Cons of SBP

  • If the beneficiary dies before the retiree, the plan is canceled, and there is no refund
  • You have limited exit plans out of the SBP
  • Very few people qualify as beneficiaries
  • SBP benefits are taxable income
  • Spousal SBP ends if the spouse remarries

Pros of Life Insurance

  • You have a lot of options to choose from
  • The lumpsum payout is useful to take care of the burial or paying off a mortgage
  • Benefits are not subject to tax
  • Benefits can be assigned to anyone or changed if the primary beneficiary dies
  • You can cancel the policy at any time

Cons of Life Insurance

  • Rates are very sporadic and depend on specifics such as your age and health condition
  • Most policies exclude certain types of deaths or occupations
  • The lumpsum is susceptible to a wide variety of risks

Frequently Asked Questions

Question: Is SBP worth the cost?

Answer: It all depends on the situation. It is seen as a good deal for military retirees who want to secure their survivors’ financial position if they die. It is considered paid in full after 360 payments or thirty years, and from here, the retiree won’t have to make an additional payment. However, it can be a raw deal if the survivor dies before the retired military member, as all the premiums will go down the drain, and no refund will be given.

Question: Can a surviving spouse receive both SBP and other benefits?

Answer: Note that SBP is an independent plan and won’t affect any other life insurance benefits the survivor was eligible for. An example is Dependency and Indemnity Compensation, another common benefit beneficiaries of military people are eligible for.

Question: Can a non-military person sign up for SBP?

Answer: No. You are only eligible for SBP if you die while on active duty, are married, or have dependent children and have completed at least 20 years of service at the time of death.

Bottomline

So, you have a choice between life insurance and SBP; what should you go for?

All families have their own stories and circumstances surrounding work, school, and life. These are the main factors that determine whether you should go for an SBP or life insurance. The idea is to get coverage that will give the adults peace of mind knowing that if something bad happens to either of them, the other will sail through smoothly.

A statement that summarizes the essence of these two says that life insurance is suitable when the insured does not live as long as you expect. SBP is perfect when the survivors live longer than you expect. Suppose a family has couples working in well-paying jobs, where the spouse who is not in service has their retirement funds.

In that case, an SBP might not be the best option since this spouse will only need a boost to take care of the family in care the military retiree passes away. In such cases, a term life insurance policy will do the trick. However, if the spouse not in service has limited finances, SBP might be the best option since it guarantees them some money for the rest of their lives.

There is no right or wrong answer, but life insurance has the edge owing to its flexibility and ability to find a perfect plan for any situation.

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