As in any financial product, there is no completely right or wrong answer and there's no completely good or bad product. The following will define some of the issues to help you make a clearer choice for you and your family.

The Basics about SBP

SBP provides a survivor a benefit of 55% of your base amount. The base amount is how much of your retired pay will be covered by the SBP insurance coverage. The 55% is constant; it's the amount of retired pay covered that can vary.

Most Service members select the entire retirement paycheck as their base amount but you have a choice. You are allowed to select, with the approval of your spouse, a base amount of coverage between $300 a month up to the full amount of your retirement check.

Your premium is 6.5% of your base amount. As your retired pay increases with cost of living adjustments (COLAs) each year so does your SBP premium since the premium is a percentage of your pay.

Example: your retirement check is $2500 a month. You cover the full amount under SBP; this becomes your base amount. Your premium will be $162.50 (6.5% of base amount). Upon your death, your spouse gets $1375 a month for life with annual cost of living adjustments. If you cover less than your full retired pay, say $1000 a month, your premium (6.5%) and benefit amount (55%) will be based on $1000 a month as $1000 is your base amount.

SBP is the only program that offers you the opportunity to continue your retired pay after your death.

That's the basics, now for the issues.

The Choice Isn't Between SBP or Life Insurance

The choice is 'SBP and life insurance' for most people. You're probably going to need life insurance regardless of SBP. Chances are 55% of your retirement pay is not close to your family's current standard of living. If you are still working, you will be replacing two incomes, your job and military retired pay. Projecting into the future when you are actually retired, you will be replacing income from military retired pay, a piece of Social Security, and possibly a part-time job. That means you will need life insurance to supplement the SBP payments. The extra life insurance will cover debts and/or provide an investment that can generate an additional income. Does your spouse earn a paycheck? If so, that probably minimizes the need for either SBP or some life insurance.

SBP is dirt simple; life insurance isn't. It's tough to put a price on simplicity but it is definitely valuable. When the military member dies, the survivor notifies the proper pay agent and the payments begin, that's it. Payments keep rolling in every month and receive COLAs annually. These regular and consistent payments are a source of supreme comfort to a survivor. Life insurance is complex and requires projections that may or may not come true; like…

How much insurance do you need now? What about in 10, 15, 20 years? You buy more later, it will cost you. If you have to buy more later, will you even qualify based on the health check? Bad things happen as we age. What type of insurance best serves your needs? After you die, what becomes of the huge lump sum? Is your spouse ready and able to manage a huge portfolio and make it last for decades? Will your beneficiary use an immediate annuity to create a lifetime income with the life insurance proceeds? Who can you trust to manage the money for your family after you're gone?

Some decide to lower their base amount to decrease the premium. Sure, you can do this. However, it's not about you and your premiums. You're dead. It's about your survivors and the amount you leave them. At some point, lowering the base amount to save on the premium makes the actual survivor benefit virtually worthless. A base amount of $500 gets the survivor $275 a month. The survivor benefit should drive the base amount decision, not the premium. Keep in mind that the premium comes out of your gross pay, pre-taxed, so the take-home pay is not impacted $1 for $1 due to the premium amount. The SBP premium reduces your tax burden so a 20% income tax rate is like getting SBP at a 20% premium discount.

Social Security may or may not be available. Social Security survivor benefits aren't automatic for every survivor. A survivor with dependent children can collect benefits for the kids until the kids turn age 16. If there are no children, the survivor has to wait until age 60 to start survivor benefits. A survivor could start receiving benefits because of young children then stop receiving the payments once the children age out of the program. The survivor will go without benefits once the children age out of the program until the survivor turns 60. At age 60, the Social Security survivor benefit is reduced due to early application. This hole in the Social Security coverage may cause a significant gap in your financial plan.

You earned that military retired pay! Without SBP, the military retired pay you risked your future for stops at death. This alone may cause some of you to get SBP just to ensure your service continues to pay your survivor when you are gone. Your spouse also had to pay for your military service. Lost career maybe, the stress, the worry, managing a household, taking care of kids alone, basically allowing you to keep your mind on the mission and not have to multi-task with things on the home front. There's a lot to be said about the philosophy that the pay should continue because two people earned it.

Life insurance is more complicated. Generally, speaking, do you want coverage for only your debts, for short-term income, or long-term income needs? There could be possible estate tax issues for some of you.

• If you want your family to be debt free at your death, add up your debts to get a total amount for life insurance purposes. Credit cards, loans, the mortgage. Kids college funds. Money to move. Burial costs. How might this figure change over the years?
• Income for a short-term? Short term might be $40,000 a year for three years. Just do the math.
• Lifetime income? Suppose you want $40,000 per year with an annual cost of living adjustment into the distant future. While oversimplified, figure annual income at 4% of a lump sum investment. A $40,000 annual income would require a $1,000,000 portfolio. The tricky part is that this investment will need to last potentially a long, long time. It must be properly and carefully managed. Who are you going to trust? Another lifetime income option is to use the life insurance proceeds to purchase an “immediate annuity” from an insurance company. Using the immediate annuity calculator on the MOAA web site under Member Benefits and Finance, you can determine how much of a lump sum deposit it would take to create a specific amount of income.

How long will you need life insurance? The default answer is until you have enough in other assets to meet or exceed your family living standard. Then the life insurance is no longer needed, theoretically. How long will that be? How much do you have in assets now? What's your game plan for reaching the magic amount of assets? How's that game plan working so far with the economy and the markets? What happens if you lose a job for a while? The last thing you want to happen is to have your insurance run out and your investment game plan didn't work out. Can you buy more insurance later (health issues may disqualify you) and at what cost?

Life insurance is cheaper than SBP. That may be true on the surface but dig a little deeper. We started with an SBP example of $2500 military retired pay creating a $1375 benefit check. A benefit of $16,500 a year with an annual COLA increase. Assuming worse case (you leave a survivor early and your insurance proceeds have to last for decades) $16,500 annually lasting for 30 years could require an investment portfolio (from insurance proceeds) of up to $400,000. Also assuming it is managed properly of course and with favorable investment winds. A COLA increase is iffy.

You can probably find $400,000 in life insurance for less than the cost of $163 a month in SBP premium ($2500 x 6.5%). But it isn't only SBP benefits you are replacing; it's the earnings a family will require to maintain their living standard. If you need to replace $150,000 a year in income (military retired pay and second career income), you may be looking at $3,750,000 in insurance.

Now does the cost of SBP with its guaranteed lifetime COLA adjusted benefits and a smaller amount of life insurance make better sense? Insurance all depends on your age, health, type of insurance, and length of insurance coverage…and lots of planning, predictions and investment help. Run your own numbers using the immediate annuity calculator on the MOAA web site.

You and your spouse need to do a little role playing to put yourselves in the right frame of mind. To set the stage, the retired military member is dead along with the salary from the current job and the military retired pay. How will the remaining family members survive financially; now and in the future? The best case scenario is the retired military spouse dies after the family has built enough wealth to continue at full financial strength. Worse case is death with no or little family assets. Keep in mind that even the best plans to build assets and wealth can go astray and at the very least it takes decades to build real substantial wealth.