As I talked about in Survivor Benefit Plan, Part I, SBP was designed to allow retired military personnel to provide income for a survivor after the death of the retiree. Though SBP has grown to include active-duty coverage, retiree coverage is still the most common type of SBP, and it is more complicated because there are choices, there are fees, and it is not automatic.
SBP is considered an annuity, which is a product in which the consumer purchases guaranteed lifetime income. Many annuities are designed to provide income for the person who makes the payments, but SBP is designed to provide income for a survivor of the retired military member. In SBP, premiums are paid directly out of retired military pay.
How Much Income Is Provided By SBP?
SBP provides income in the amount of 55% of the base amount covered. The base amount covered may be any amount from $300 per month up to the entire amount of retired pay. The base amount is chosen at the time of retirement. For example,
- For $2000 base amount covered, survivor payments would be $1100 per month
- For $1000 in base amount covered, survivor payments would be $550 per month
- For $500 in base amount covered, survivor payments would be $275 per month
- or any other amount between the full amount of retired pay and $300.
While I can not find this written anywhere, it seems that the base amount is calculated as a percentage of full retired pay. I say this because the base amount adjusts with each retiree Cost of Living Adjustment (COLA), and I can’t imagine any way to do those calculation except as a percentage of full retired pay. With each adjustment in base amount, there is a corresponding adjustment in premiums and benefit payments.
How Much Does SBP Cost?
SBP premiums are always calculated as a percentage of the base amount of coverage. The cost of coverage depends on which category of beneficiary is selected. The most frequently selected beneficiary is the spouse or former spouse, and the premiums are the same. For spousal coverage, the monthly premium is the lesser of:
- 6.5% of the base amount, or
- 2.5% of the first $635 ($15.88), plus 10% of the remaining covered amount.
For example, $2000 of base amount covered would require a $130 monthly premium for spouse or former spouse coverage.
Premiums for child coverage are based upon the age of the retiree, the age of the youngest child at the time of retirement, and the age of the spouse/former spouse if combination coverage is selected. Exact premium amounts can be provided by your finance or personnel center.
Insured Interest coverage also has variable premiums that are based upon the age of the retiree and the age of the beneficiary.
SBP premiums are deducted from retired military pay pre-tax, which reduces the overall cost of the premiums. For example, if a retiree is in a 25% tax bracket and is paying premiums for spousal coverage at a $2000 base amount:
|Premiums Paid Pre-Tax||Premiums Paid Post-Tax|
|$2000 base amount||$2000 base amount, taxable at 25%|
|- 130 per month premium||= 500 income tax paid|
|= 1870 net income, taxable at 25%||= 1500 net income|
|= 467.5 income tax paid||- 130 per month premium|
|= $1402.40 net pay received||= $1370 net pay received|
A few things to consider:
- The choice of coverage is elected during the retirement paperwork process. If a retiree is married, the spouse must sign off on the amount of benefit selected. If less than 100% of retired pay is selected as the base amount, the spouse will be asked to verify that they understand what is being selected.
- There are no provisions to change the election once made. This is a permanent decision!
- SBP is just one part of a comprehensive plan to provide lifetime income for the service member and any survivors. Other factors that must be considered include any retirement pension from the spouse’s employment, income provided by TSP, 401(k)s or 403(b)s, life insurance or other annuities, Individual Retirement Accounts, real estate, and other assets.
- There is a provision for premiums to be considered “paid up” after 30 years or 360 payments. This provision has specific parameters – check with your finance or personnel office for more specific details as it may apply to your exact situation.
- SBP annuity payments may be offset by Dependency and Indemnity Compensation payments. That is a subject I will write extensively about on another day in this series.
Whew! I hope that I’ve hit everything in this segment. Wondering what I’m talking about? See Survivor Benefit Plan, Part I: What Is SPB and Why Do I Need To Know? I hope you’ll join me next time as we talk about Active Duty SBP benefits. They’re easier, I promise.