Understanding the Survivor Benefit Plan

| October 31, 2012

The Survivor Benefit Plan (SBP) allows military retirees to protect their spouse (or other survivors) by insuring that a portion of their retired pay continues after their death, providing a guaranteed lifetime income.

The decision to enroll in this program is made prior to retirement and is irrevocable. And for married personnel, it’s a decision they cannot make alone. The spouse of a military retiree must consent to any protection level that is less than 100 percent. If the maximum election is made, the cost for spouse-only coverage is 6.5 percent of gross military retired pay.

Everyone’s situation is different. As you consider the SBP and alternatives, here are some things to keep in mind:

Possible Advantages of the SBP

  • No evidence of insurability is required.
  • No suicide or incontestability clauses.
  • Benefits are tied to retired pay increases.
  • SBP costs are not subject to federal income tax or state income tax in most states.*
  • Survivor’s benefits are subject to federal estate taxes, but in most cases are eligible for the unlimited marital deduction.*
  • Benefits are not subject to garnishment, lien, or other legal processes.
  • Benefits may be payable for the lifetime of beneficiary.

Possible Disadvantages of the SBP

  • No residual estate remains after death or marriage of designated beneficiary.
  • Monthly benefit is subject to federal income tax as ordinary income.*
  • Monthly benefit is subject to state income tax in some states.*
  • Preferred risks subsidize uninsurable risks.

Additionally, SBP costs, benefits, and provisions are continuously subject to revision by legislative and administrative action.

*Appropriate professional tax counsel should be consulted regarding matters of taxation.

Did you enroll in the SBP? Did you consider alternatives? What went into your decision-making process?


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