Survivor Benefit Plan or Term Life Insurance?

Two people's hands are showing as they look over paperwork.
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The 2023 Survivor Benefit Plan open season is upon us. It has made me think a lot about this important program that allows retirees to protect up to 55% of their retirement income for their loved ones.

I'm a fan of term life insurance. However, I'm not promoting it here. Yes, there are lots of very important reasons for you to have term life insurance: replacing income for a survivor, caring for young children, paying off debts, funding college, etc. However, I don't think replacing the military's Survivor Benefit Plan is one of those reasons. That's primarily because all those great reasons for having term life coverage share a common trait: They are temporary in nature. Kids will grow up; debts will be paid off; and college will be conquered. On the other hand, SBP offers permanent protection. In short, term life insurance will one day run out, and SBP will not.

That's why I get a little uncomfortable when soon-to-be military retirees start talking about buying term insurance and skipping out on the protection afforded to their spouse through SBP. Don't get me wrong -- this is an option. However, it may not be the right option for you and your family. When it comes to something as important as caring for the ones you love, getting it right is critical.

"It's more expensive than term insurance" is a common complaint about SBP. And while that's often true, in my mind, that difference alone is not enough to tilt the scales in favor of term insurance. If you are looking for protection comparable to SBP, a permanent life insurance policy is more appropriate. And guess what? That type of coverage will likely cost a lot more than SBP.

Below, I have identified two scenarios in which term life insurance would be a good or lucky choice:

  • You die before your term life insurance policy expires. Assuming you have adequate life insurance coverage to replace the protection offered by SBP (or more) and die with that coverage in force, buying the life insurance would likely work out for your spouse. Of course, you probably have no idea when you will leave this earth, and there are no guarantees. But if you get it right, this is a scenario in which term life insurance could work in lieu of SBP. But, again, I say this is a lucky choice because if you die one day after it expires, your spouse receives nothing with term life insurance but would with SBP.
  • You don't need SBP's protection when your term policy expires. With level term insurance, you select a "term," or number of years. During that term, you pay a level premium for the selected coverage. All other things being equal, the shorter the term, the smaller the premium. For example, a $400,000 10-year term policy will be less expensive than the same amount of coverage through a 20-year term policy. Details vary from policy to policy, but once the term is over, the coverage may decrease, the cost may skyrocket, or you could be left without coverage. So, for term insurance to be a good choice relative to SBP in this scenario, you must pick a term that allows you enough time to build your finances to a point where you no longer need protection. Unfortunately, that's not as common as you might think. According to recent Federal Reserve data, the average retirement savings of those ages 65 to 69 is just $206,819, likely a far cry from being financially secure in, or entering, retirement.

Now, let me circle back to that hollow feeling in the pit of my stomach that is an inevitable byproduct of this discussion. Why do I feel uncomfortable when someone starts talking about term life insurance in lieu of SBP? First, chances are the typical military retiree in his or her early 40s is going to live well beyond the coverage provided by a 20- or 30-year level term policy. In fact, according to Social Security's online life expectancy calculator, a 42-year-old male can expect to live an average of 39.6 additional years and a 42-year-old female, an additional 43.4 years. So, the odds are against Scenario 1 playing out.

Scenario 2 depends on all the same factors that go into creating financial independence. When you're in your early 60s or 70s, will you have accumulated the hundreds of thousands of dollars still necessary at that point in time to replace SBP's protection? Again, another question I can't answer. However, I do know that what you save by paying less for term insurance than SBP will not power your finances to this place.

In the end, for a lot of families, "SBP or term life insurance?" is not the right question to be asking.

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