Paycheck Chronicles

Term Insurance Over SBP?

To be clear, I work for a company that sells a lot of life insurance. However, I’m not selling today. Yes, there are a ton of very important reasons you should have term life insurance: Taking care of your spouse, caring for kids, paying off debts, funding college, etc. However, I’m not sure replacing the military’s Survivor Benefit Plan would be one of those reasons.

In fact, 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.  However, I have identified two basic scenarios in which it could make sense to opt for term life insurance over SBP. Here we go:

  1. You die before your term 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 okay for your spouse. Of course, you probably have no idea when you will leave this earth and beyond taking matters into your own hands, 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.  
  2. 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.

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 term life insurance in lieu of SBP? First, chances are the typical military retiree in his or her early 40’s 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 40 additional years; a 42-year- old female, an additional 43.5 years. So, the odds are against scenario one playing out.

The second scenario is dependent on all the same factors that go into creating financial independence.  When you’re in your early 60’s or 70’s will you have accumulated the hundreds of thousands 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.

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