Why Should you Care About the Survivor Benefit Plan Open Season in 2023?

When a retiree dies, his/her retired pay (and VA disability compensation) also expire. The Survivor Benefit Plan is a continuation of part of retired pay for a surviving spouse and or children. It can also support special needs dependents too.

The 2023 National Defense Authorization Act (NDAA) authorized a rare “open season” for eligible active and reserve retirees to get into or out of the Survivor Benefit Plan (SPB). This is a big deal as there have been very few other open seasons in history (about one per decade and at the whims of Congress) and retirees end their service knowing that opting out of SBP is generally a one-way door.

Because opting back in is the rarer opportunity, this article focuses on getting back into SPB versus opting back out past the normal 3^rd year opportunity.

A Quick SBP Primer

The DFAS website (and countless other blogs) has all the weedy details about SBP, but here’s what you really care about. We’ll focus on the most common case—a married service member that chooses the Spouse full coverage SBP option. SBP costs 6.5% of retired pay per month. It comes out pre-tax. If the military member dies, the surviving spouse gets 55% of the military member’s retired pay.

The Pros of SBP include:

Inflation-adjusted income for the surviving spouse until remarriage (before age 55) or death.
The amount received is generally enough for a mortgage but is unlikely to cover 100% of expenses.
The surviving spouse does not have to determine how to invest an insurance payout to create lifetime income.

The Cons of SBP include:

If feels expensive initially-especially for military members that aren’t sure what their financial situation will look like on the other side of military retirement.
It looks expensive compared to sizeable amounts of Term Life Insurance.
55% of say, 50% of basic pay isn’t enough to live on.
The benefit is taxable as ordinary income. Insurance payouts are tax-free and returns from invested insurance dollars could be at more favorable capital gains tax rates.
It goes away with remarriage before age 55 (but comes back if the new spouse dies or divorces).
Except for unpredictable and rare open seasons, it cannot be cancelled after the 3^rd year of premiums. The premiums last for 30 years or until death.

There is an excellent, inexpensive, and short book available by a retired naval officer that has even more detail. In my experiences there are a few key reasons why retirees decline or opt into SBP.

Reasons that retirees take SPB:

Health conditions prevent attempting to replace it with Term Life Insurance and any other form of insurance is expensive and inadequate to the task.
Spouse indicates that s/he feels more secure knowing that there will always be some basic level of inflation-adjusted income.
Spouse will be unable to earn an income sufficient to provide for the family’s needs.
The family has not built a nest egg at military retirement such that, the nest egg combined with a Term Life Insurance payout could replace the income from SBP.

Reasons retirees decline SBP:

The premium is several hundred dollars per month and feels expensive compared to any other insurance the member has encountered.
Both spouses will be military retirees, thus one pension will continue if one spouse lives.
Both spouses work such that the surviving spouse expects to provide for his/her own needs (plus any children).
The family has purchased sufficient Term Life Insurance and believes that:
If the retiree dies, the spouse can invest and manage the payout to replace lifetime income needs.
The family has a nest egg growing such that the family will be self-insured before the life insurance term expires (which the surviving spouse can invest and manage to replace lifetime income needs).

Keep in mind that what you just read is a low pass over an extremely important topic and it’s vital to your family’s well-being to invest the time and effort required to make a fully informed decision about SBP.

Opting Back Into SBP

While the DOD has yet to announce the devilish details of how the SBP Open Season will work, the NDAA gives us enough information to start exploring the concept. Let’s examine the case of an O-6 that retired at 23 years in 2020, receives $6,500 per month in retired pay, and chooses to opt back into SBP during the calendar year 2023 Open Season.

The NDAA states that members will need to meet the following criteria to opt back in:

Repay missed premiums since retirement (becoming eligible for SBP)
Pay interest on the missed premiums
Pay any other fees/penalties instituted by DOD

One not-so-small detail in the NDAA is that the calculations on these payments are supposed to be from the date one elects to opt back into the SBP. If SBP Open Season isn’t already up and ready to as of the NDAA signing (it doesn’t appear to be as I’m typing), then retirees may have to pay for extra months simply because there is no way to opt back in yet.

Sample calculations (holding inflation at 0%) on the costs of opting back into SBP might look like:

Months in non-covered status: 36
Total premiums not paid: $15,210 (36 months * $6,500 * 6.5%)
Interest on premiums: $685 (hypothetical 3% interest compounded monthly from first “missed premium”)
Fees: $500 (hypothetical administrative fee)
Total upfront payment to opt back into SBP: $16,395
Remaining premiums paid over next 27 years if retiree does not die during the normal 30-year payment period: $136,890
Total cost of SBP over 30 years: $153,285
Total retired pay received over 30 years: $2,340,000

Wow! That’s a lot of Money…

You live in a different financial world if those numbers are budget dust to you. For most readers, separating with six figures of pay for a benefit that may never be used is hard to swallow. Remember though, opting back into SBP is about taking care of a spouse that doesn’t share your interest in the details of investing such as costs, taxes, asset allocation, timing, account types, custodians, etc.

Still, if you’ve reconciled that you might be willing to make the monthly premium payment going forward (6.5% of your retired pay) but are having a hard time stomaching the upfront cost, it might be good to revisit alternatives.

Perhaps you initially purchased $1.5 million of 20-year term coverage, but now feel as though inflation has eroded the buying power of those dollars. Have you looked at getting more term coverage, perhaps for a longer period? $16,395 would buy nearly 15 years of an extra $1M term policy at $100 per month. What additional amount of time and payout to your nest egg would have you and your spouse comfortable trading guaranteed secure income for a one-time windfall?

That $16,395 payment would have bought my first new car and most of the price of the cars I’ve bought since. It’s a bit more than I plan to spend on vacations and travel most years. What line items from your family’s budget could skinny-down for a year or two to pay for the upfront missed premiums?

Since ultimately, we’re talking about purchasing a feeling of security for a widow(er), what is that worth? Clearly this is a complex question to answer, and each family needs to do both mathematical analysis and wade carefully through what might be an emotional mine field to get to the right answer.

Cleared to Rejoin

SBP is an important part of your retirement benefits. While it may seem expensive, it’s really about buying security for your spouse/family during part of their life they never expected to have to live: without you. Even if you have what feels like sufficient life insurance, will your spouse be up to the task of turning a life insurance payout into income for life?

If you consider buying back into SBP, it will be important to compare the costs versus alternatives such as even more life insurance. Since you can’t enroll just yet, here are action steps you take today:

Review your life insurance and the assumptions behind it
Project your nest egg’s growth under varying conditions
Plan where the SBP upfront re-enrollment costs might come from
Project your new budget with the SBP premium factored in
Revisit the DFAS SBP Open Season site (or set up a Google News Alert) weekly
Talk to your spouse about the pros and cons of your current choice and the alternatives