Survivor Benefit Plan vs Life Insurance: What Military Retirees Need to Know

Retiring from the military is a major milestone. It’s a time to reflect on your service and plan for your family’s future. One of the biggest decisions you’ll face is how to ensure your loved ones are financially secure after you’re gone. 

Two options often come up: the Survivor Benefit Plan (SBP) and life insurance, particularly term life insurance. Both are designed to provide financial support, but they work in very different ways. 

This article breaks down what each option offers, compares them side by side, and helps you decide which might be right for you.

Understanding the Survivor Benefit Plan (SBP)

The Survivor Benefit Plan is a program offered by the Department of Defense for military retirees. Its purpose is to provide a steady, lifelong income to your spouse or other eligible dependents after your death. Think of it as a way to continue part of your retirement pay for your family.

How SBP Works

• Eligibility: You qualify for SBP if you retire after at least 20 years of military service or are medically retired.
• Coverage Options: You can cover your spouse, spouse and children, children only, a former spouse (if court-ordered), or an “insurable interest” like a parent or business partner if you have no spouse or children.
• Benefit Amount: The maximum benefit for a spouse is 55% of your retired pay. For example, if you receive $4,000 a month, your spouse could get up to $2,200 monthly. You can choose a lower percentage if needed. For children, the benefit is also 55%, split equally, but only while they’re eligible (typically until age 21 or 23 if in school).
• Premiums: The cost is about 6.5% of your retired pay for spouse coverage, deducted monthly before taxes. This pre-tax deduction lowers your taxable income, making it more affordable. The government also subsidizes part of the cost, which keeps premiums lower than many private insurance plans.
• Inflation Protection: SBP payments increase with inflation through Cost of Living Adjustments (COLAs), just like your retired pay. This ensures the benefit keeps its value over time.
• No Health Checks: Unlike most insurance, SBP doesn’t require medical exams or health questions. Anyone eligible can enroll, regardless of health.

Pros and Cons of SBP

Pros:

• Lifelong income for your spouse or dependents.
• Inflation adjustments keep payments relevant.
• No health requirements, making it accessible to all retirees.
• Tax-advantaged premiums reduce your taxable income.

Cons:

• Limited flexibility; once you enroll, it’s hard to change or cancel.
• No lump-sum payout for immediate expenses like funerals or debts.
• Tied to military retirement, so it’s not portable.

SBP is ideal for ensuring long-term financial stability, especially for a spouse who might outlive you by many years. However, it’s not a complete solution—it won’t cover one-time costs, so you might need additional coverage.

Understanding Life Insurance (Focusing on Term Life)

Life insurance is a contract between you and an insurance company. You pay premiums, and if you die, the company pays a death benefit to your beneficiaries. There are many types of life insurance, but term life insurance is the most common alternative to SBP because it’s affordable and widely available.

How Term Life Insurance Works

• Coverage Period: Term life covers you for a set period, like 10, 20, or 30 years. If you die during this time, your beneficiaries get a tax-free lump sum. If you outlive the term, the policy expires, and there’s no payout unless you renew or convert it to permanent insurance.
• Premiums: Premiums are fixed for the term but depend on your age, health, and coverage amount. For example, a healthy 40-year-old might pay $20–$40 a month for a $500,000, 20-year policy. Renewing after the term usually means higher costs, especially as you age.
• Death Benefit: The lump sum can be used for anything—paying off a mortgage, funding college, or replacing lost income. It’s tax-free, which is a big advantage.
• Flexibility: You can choose the coverage amount and term length to match your needs. Some policies let you add riders, like accidental death benefits, or convert to permanent insurance later.
• Portability: Term life isn’t tied to your job or retirement status. You can keep it no matter where life takes you.
• Health Requirements: Most policies require a medical exam or health questionnaire. If you’re healthy, you’ll get lower rates. If not, premiums could be higher, or you might not qualify.

Pros and Cons of Term Life Insurance

Pros:

• Affordable, especially for younger, healthy people.
• Flexible; you can adjust coverage or let it lapse.
• Portable, so it moves with you.
• Tax-free death benefit for beneficiaries.

Cons:

• Temporary coverage; no benefit if you outlive the term.
• Premiums increase with age or health changes.
• Requires medical underwriting, which can limit access.

Term life is great for covering specific, time-bound needs, like a mortgage or raising kids. But it’s not designed for lifelong protection unless you keep renewing or converting, which can get expensive.

Comparing SBP and Term Life Insurance

To make an informed choice, let’s compare SBP and term life insurance across key factors:

Breaking Down the Differences

• Payout Structure: SBP provides a steady monthly payment, perfect for ongoing expenses like rent or groceries. Term life gives a single, large payment, ideal for big costs like paying off a home or funding education.
• Coverage Duration: SBP lasts for your beneficiary’s lifetime, offering permanent security. Term life only covers the set term, so if you live past it, your family gets nothing unless you renew.
• Cost: SBP’s 6.5% of retired pay is predictable and tax-advantaged. Term life can be cheaper for healthy people, but it varies widely based on age and health.
• Flexibility: SBP is rigid—once you’re in, you’re usually locked in. Term life lets you change coverage, add riders, or drop the policy if your needs change.
• Portability: SBP is only for military retirees and stays with your retirement plan. Term life goes wherever you go, making it more versatile.
• Tax Treatment: SBP premiums lower your taxable income, but benefits are taxed. Term life premiums are paid with after-tax dollars, but the payout is tax-free.
• Inflation Protection: SBP’s COLAs ensure payments keep up with rising costs. Term life’s payout is fixed, so its value might erode over time.
• Health Requirements: SBP is open to all retirees, no questions asked. Term life often requires a health check, which can be a hurdle if you have medical issues.

This comparison shows that SBP and term life serve different purposes. SBP is about long-term income, while term life is about immediate, specific needs.

When to Choose SBP vs. Term Life Insurance

Your choice depends on your family’s needs, your health, and your financial plans. Here are some scenarios to guide you:

When to Choose SBP

• Younger Spouse: If your spouse is much younger, SBP ensures they have income for decades. For example, a 45-year-old retiree with a 35-year-old spouse might want SBP’s lifelong payments.
• No Health Concerns: Since SBP doesn’t require medical exams, it’s a safe bet if you have health issues that make life insurance costly or unavailable.
• Inflation Worries: If you’re concerned about rising costs, SBP’s COLAs keep the benefit’s value steady.
• Simplicity: SBP is straightforward—premiums come out of your retired pay, and your spouse gets payments automatically.

When to Choose Term Life Insurance

• Specific Needs: If you need to cover a mortgage, fund college, or replace income for a set time, term life’s lump sum is perfect.
• Healthy and Young: If you’re in good health, you can get low premiums for high coverage, making term life cost-effective.
• Financial Independence: If you expect to have enough savings by the end of the term (say, by your 60s), you might not need lifelong coverage.
• Flexibility Needs: If you want the option to adjust or cancel coverage, term life gives you that freedom.

Combining Both

Many retirees don’t choose one over the other—they use both. For example, you might enroll in SBP for lifelong income and buy a 20-year term life policy to cover a mortgage or your kids’ education years. This combo gives you the best of both worlds: steady income and a lump sum for big expenses.

Real-Life Scenarios

• Scenario 1: Younger Spouse, Limited Savings
  John, a 50-year-old retiree, has a 40-year-old spouse and no major savings. He chooses SBP to ensure his spouse has income for 30–40 years after he’s gone. The COLAs give him peace of mind that she won’t struggle with rising costs.
  
• Scenario 2: Healthy Retiree, Big Mortgage
  Sarah, a 45-year-old retiree, is healthy and has a $200,000 mortgage. She buys a $250,000, 20-year term life policy to cover the mortgage and other debts if she dies. She skips SBP because she expects to build savings by retirement.
  
• Scenario 3: Combined Approach
  Mike, a 48-year-old retiree, enrolls in SBP for his spouse’s long-term security. He also gets a $500,000, 15-year term life policy to cover his kids’ college costs and a car loan. This balances immediate and future needs.
  

Things to Consider

• Health Status: If you have health issues, SBP’s lack of medical underwriting is a big plus. Term life might be pricier or unavailable.
• Life Expectancy: Military retirees often retire in their 40s. If you’re 42, you might live another 40 years, outliving a 20- or 30-year term policy. SBP ensures coverage no matter how long you live.
• Financial Goals: If you’re building wealth through investments, term life might be enough until you’re financially independent. If not, SBP’s lifelong payments are safer.
• Tax Implications: SBP’s taxable benefits might mean less take-home pay for your spouse. Term life’s tax-free payout could be more appealing for large expenses.

Making the Decision

There’s no one-size-fits-all answer. SBP offers permanent, inflation-protected income but lacks flexibility. Term life is affordable and flexible, but temporary. Your choice depends on:

• How long do you want coverage to last?
• Whether you need a monthly income or a lump sum.
• Your health and ability to get term life insurance.
• Your family’s financial needs and future plans.

A financial advisor who specializes in military benefits can help. They can run numbers, like comparing SBP’s monthly payments to a term life payout invested over time, to see what makes sense for you. For example, a $1.5 million term life payout might last 30–40 years if invested, but SBP could provide more if your spouse lives longer.

Final Thoughts

Choosing between SBP and term life insurance is a personal decision that requires careful thought. SBP ensures lifelong security with inflation protection, while term life offers flexibility and immediate funds. 

Many retirees find that combining both creates a balanced plan. Whatever you choose, make sure it aligns with your family’s needs and gives you peace of mind. 

Talk to an advisor, review your finances, and make a choice that protects your loved ones for years to come.