Is SBP worth it? Why retirees treat the election as closed too soon

Is SBP just overpriced life insurance?

No. Full spouse coverage costs 6.5% of the base amount you choose and pays your survivor 55% of that base for life. Both numbers rise with retired-pay COLAs, so inflation doesn't change the ratio. Premiums come out of gross retired pay before federal income tax; the annuity is taxable to the survivor.

Retirees often say SBP costs too much for what it pays. The ratio answers that: 6.5 cents of each base dollar buys 55 cents of monthly income for the survivor's whole life, with no medical exam. Inflation doesn't tilt it either way, because both sides ride the same COLAs.

Another belief is that the TSP will cover a spouse anyway. Lamar, a Navy Reserve chief we'll follow through this article, has $540,000 across the TSP and a 401(k). That money can be spent down or fall in a bad market, because investments can lose value, including the money you put in. SBP is a government-paid monthly check that lasts as long as the survivor lives.

A third belief says premiums stop at 70. They stop only after 360 monthly payments and age 70, both. A reservist whose retired pay starts at 60 reaches 360 payments at 90, so most reservists pay for the whole retirement. Any break-even has to assume the premiums keep running.

Did the end of the DIC offset change the math?

Yes. Older advice often said to decline SBP because VA Dependency and Indemnity Compensation used to reduce SBP dollar for dollar, the so-called widow's tax. Congress has since phased that offset out completely, and an eligible survivor now receives both SBP and DIC in full. A retiree deciding now, as Lamar will at 60, shouldn't reuse advice written under the old offset. Check any article's date before trusting its break-even.

When does SBP break even for a reservist?

SBP breaks even when the survivor collects about 0.12 years of annuity for each year of premiums, because 6.5 ÷ 55 is roughly 0.12. Ten years of full premiums are repaid by about 1.2 years of checks, before interest. A spouse who outlives the retiree by 3 years clears that bar easily.

In a hypothetical household, Lamar is 58, a divorced Navy Reserve chief with 24 good years and an IT manager for a hospital system. He expects $2,400 each month in reserve retired pay at 60 and will be single then. A court order splits the pay but doesn't require former-spouse SBP.

Before any election, his pay leaves nothing to a survivor. With full coverage, the premium is 6.5% × $2,400 = $156 each month, or $1,872 each year. A survivor would receive 55% × $2,400 = $1,320 each month, or $15,840 each year.

A retiree who is single when pay starts can elect spouse coverage within 1 year after a later marriage. Assume Lamar dies at 82. Electing at 60 means 22 × $1,872 = $41,184 in premiums. Marrying at 62 means 20 × $1,872 = $37,440. Marrying at 65 means 17 × $1,872 = $31,824. Dividing each by $15,840 gives break-even of about 2.6, 2.4 or 2.0 years. A spouse 8 or more years younger usually clears that bar easily.

Treating the election as closed once retired pay starts catches careful planners who studied SBP before 60. If Lamar married at 62 and let the first anniversary pass without filing, his spouse would lose $15,840 each year, and he'd have saved only $1,872 each year. Before Savant Wealth Management suggests an election, it puts the break-even years, the spouse's age gap and the due date for filing on one page.

The test ignores what the premium could have earned elsewhere. Invested at an assumed 5% a year, for illustration, the $1,872 would leave the survivor needing somewhat longer to come out ahead.

Who should skip or trim the coverage?

A spouse who is older or seriously ill may not collect for the 2 to 3 years needed to break even, and a spouse with a large pension of her own will owe income tax on the annuity on top of it. In both cases a smaller base amount or no coverage can make sense.

The base amount can be anything from $300 up to full gross pay. At $300, the premium is $19.50 each month and the annuity is $165. A married retiree who chooses less than full coverage needs the spouse's notarized written consent, so the choice can't be made quietly.

Lamar should read the decree for SBP language before anything else. If it orders former-spouse SBP, the former spouse can request a deemed election within 1 year of the court order. Only one spouse or former spouse can be the beneficiary, so a later wife could not be covered. This page's example assumes the order divides retired pay only. Savant Wealth Management advisors read that wording before running any numbers.

SBP pays only these people. The annuity ends when the survivor dies and leaves nothing to heirs. Grown children are reached through TSP and 401(k) beneficiary forms, not through SBP.

• Spouse or former spouse
• Children under 18
• Full-time students under 22
• Children disabled before 18

What do I gather before applying for retired pay?

Gather your RCSBP election (DD Form 2656-5), a retired pay estimate from your service's personnel center, the divorce decree and your TSP and 401(k) beneficiary pages, then run the break-even and file DD Form 2656 with the retired pay application. This page assumes Lamar chose Option A, which waits until 60.

Take the steps in this order. First, pull the RCSBP election made when the 20-year letter came. Under Option B or C the election is already set and costs an extra reserve premium. Second, get the retired pay estimate. Third, read the decree for SBP terms. Fourth, run the break-even. Fifth, file the election with the application.

Here is where each document lives.

Three different people file SBP paperwork (Lamar, a spouse and possibly the former spouse), and two of the due dates run 1 year from an event, not from retirement. DFAS figures and the decree's wording govern any real election.

• 20-year letter and DD Form 2656-5 copy: personnel record or Navy Personnel Command
• Points statement: service personnel center
• Divorce decree and court order: court clerk or attorney
• TSP and 401(k) beneficiary pages: tsp.gov and plan website
• Spouse's age and pension estimate, if he marries

Where would Savant Wealth Management look first?

Savant Wealth Management would start with the RCSBP election on file and the SBP wording in the divorce decree, because those two documents decide which choices are still open. Next it would set the gross retired pay estimate against the age gap of any spouse to see how many survivor years clear the break-even. It makes no promise about the result.