Why is 2023 an important year for retired military service personal? For many, this year presents a once-in-a-lifetime-opportunity.
What is the Survivor Benefit Program (SBP)?
When retiring from the military, a service member can choose to elect SBP. The service member pays premiums in retirement (6.5% of their retiree pension). When the service member passes away, their spouse (or children if under 18 – or 22 if a student) will receive 55% of the pension. Retiring service members elect this to provide for their spouse and children.
Why some retires didn’t elect SBP?
In many cases, SBP is a good buy because the cost of SBP (6.5% of a retirees pay) is less than providing a similar benefit in the form of life insurance. However, there are typically 3 reasons why service members don’t elect SBP.
1) They don’t have dependents – If a service member is unmarried, doesn’t have minor children (or under 22 and full-time students), or doesn’t have children that were disabled during childhood, there’s no need to pay the 6.5% premium.
2) Their spouse doesn’t need the income – If a service member has sufficient savings or their spouse doesn’t need the support, a retiring service member may not elect SBP. This a personal decision, and requires a more fine-tuned assessment by a financial professional.
3) The DIC Offset – When a member of the military passes away in the line of duty or passes away later in life as a result of injuries sustained in the line of duty, their spouse receives Dependency and Indemnity Compensation (DIC) benefits from the Department of Veterans Affairs (VA). Up until 2023, if a surviving spouse received SBP Payments and DIC payments, SBP was reduced by DIC. This made paying the SBP premiums less attractive if DIC payments are expected.
What’s the opportunity?
A retiree can only elect SBP when retiring. He/She can’t elect SBP after they’ve already been retired; except in 2023. 2023 is a special open season for SBP where a retiree elect SBP to get coverage even when already retired. Why? Because the DIC Offset officially ended at the beginning of 2023. Now, SBP to surviving spouses will not be offset by DIC payments. With this new information, Congress deemed it fair to allow retired service members to go “back in time” and elect the SBP coverage.
What’s the “catch”?
To go “back in time” and elect SBP at separation from the military, one also needs to pay back all missed premium payments. For example, if a retiree received $50,000 in retirement pay for the last 5 years, they need to pay 6.5% of $250,000 as missed SBP premiums. That’s $16,250.
Should I use this special open-season in 2023 to elect SPB when I previously declined it?
As with most questions in the financial planning world, the answer is, “It depends.”
· If you and your spouse are older, it generally disincentives you from electing it because the missed premiums will be a high cost and the potential benefit is lower.
· If you are “young”, healthy, and close to your spouse in age, you may not want to elect SBP.
· If you’ve grown sufficient assets and/or have lower retirement costs than expected, you may not want elect SBP.
· If your spouse is considerably younger than you are and you’re in poor health, you are incentivized to elect SBP.
· If your health puts you in a position where purchasing life insurance is cost-prohibitive, then, depending on your age, you might want to elect SBP.
There isn’t a one-size fits all to this question. At IFP, these are the types of questions we ask to “hone-in” on specifics. We can make appropriate recommendations only when listening, learning, and analyzing your specific details. We’d love to help. Give us call.
