Survivor Benefit Plan (SBP) explained: cost, payout and choices

Military retired pay stops when the retiree dies. The Survivor Benefit Plan (SBP) is how a retiree keeps part of it going to a spouse or children afterward, and the choice is made, in most cases, once: on the paperwork you fill out when you retire. It is one of the largest financial decisions a military family makes, and it gets a fraction of the attention that the retirement date or the move does.

I am still on active duty, so for me this is a decision ahead, not behind, and that is exactly why it is worth understanding before the retirement paperwork arrives. This guide walks through what SBP pays, what it costs, who can be covered, and which choices are hard or impossible to undo, using the Defense Finance and Accounting Service's own pages. They are listed at the end so you can read them in full.

What SBP pays

SBP pays an annuity: a monthly payment for the lifetime of the beneficiary. DFAS describes the amount as a percentage of retired pay that depends on your election, and the plan provides up to 55% of a service member's retired pay to an eligible beneficiary when the member dies. If you elect full coverage, your surviving spouse receives 55% of your full retired pay; if you elect coverage on a smaller base amount, they receive 55% of that base.

Three features set it apart from a private life insurance policy, in DFAS's own description:

• It keeps up with inflation. The annuity increases each December with a cost-of-living adjustment based on the Consumer Price Index.
• Age and health do not matter. Coverage cannot be cancelled or revoked because of an illness or your age, and neither your age nor your spouse's affects the cost.
• Social Security does not reduce it. DFAS says the receipt of survivor benefits will not be affected by Social Security benefits.

What SBP costs

Coverage is free while you are on active duty. In retirement, the premium is deducted from your retired pay each month, and for spouse coverage it can be no more than 6.5% of the base amount you elect. DFAS gives two examples with $1,000 of monthly retired pay:

Scale it up and the numbers get real. On $3,000 a month of retired pay with full coverage, the premium would be $195 a month (6.5%), and the annuity to a surviving spouse would be $1,650 a month (55%), before cost-of-living increases on both. Your own figures depend on your retired pay and the base you choose; DFAS also notes there is a minimum level of coverage that is unique to each retiree.

Two details soften the cost. For nearly all retirees the premium comes out of gross pay before federal income tax is withheld, which lowers taxable income. And premiums do not last forever: you stop paying once you reach "paid-up" status, which DFAS defines as having made 360 months of premium payments and reaching age 70.

Is it worth it?

DFAS offers a rule of thumb for weighing cost against benefit: for an even return, your beneficiary typically must receive payments for seven months for every five years you pay premiums. Someone who pays for 25 years would, by that rule, need their survivor to collect for about three years to come out even, and payments then continue for the rest of the survivor's life. Whether that is a good trade depends on your family's ages, health, other savings and life insurance. That is a personal call, and DFAS frames it as one that requires careful consideration.

Who you can cover

At retirement you choose a type of beneficiary on your retirement paperwork. DFAS says the most common election is spouse-only coverage based on full retired pay. The options include:

• Spouse, at full or reduced coverage.
• Spouse and children, with all children covered in equal shares. Adding children adds to the cost, which depends on the ages of the retiree, the spouse and the youngest child.
• Children only, if you are unmarried or your spouse concurs. The cost depends on the age of the retiree and the youngest child.
• Former spouse, voluntarily or because a court orders it, with its own deadlines.
• A person with an insurable interest, such as a brother or sister, if you have no other eligible dependents. The annuity is the same 55% of covered pay, but the cost is considerably higher: DFAS gives 10% of gross pay on one page and says it can run up to 40% depending on ages on another. Unlike the other elections, it can be cancelled at any time, and it can only be elected at retirement.

An eligible child must be your legal child and unmarried, and under 18, or enrolled in an accredited college or university until 22 or leaving school. A child who is incapable of self-support because of a disability that began before 18 (or before 22 while in school full time) remains eligible.

Your spouse has to sign

If you are married, declining coverage or choosing anything less than full spouse coverage requires your spouse's notarized signature. DFAS lists what makes an election invalid, including declining or reducing coverage without that concurrence and a spouse signing before the member. If you submit an invalid election, or none at all, an election is started automatically and costs the same as spouse-only coverage on gross retired pay. This is a decision for both of you, and the law is written so that it has to be.

The decisions you cannot easily undo

DFAS is blunt about this: the election you make at retirement is very difficult to change, and there are only a few circumstances in which you can. Here is what the rules allow and what they do not.

Declining is close to permanent

If you have an eligible spouse or children at retirement and decline to cover them, you will not be able to change that later. Decline spouse coverage, and you cannot cover a later spouse. Decline coverage for children you have, and you cannot add a child born or acquired after retirement.

New family after retirement

If you had no eligible beneficiaries when you retired and later marry or have a child, you have one year from the date of the marriage or birth to add coverage, using DD Form 2656-6.

An exit window in the third year

From the 25th through the 36th month of retirement, you can cancel your SBP election. It is an exit only: it does not let you start coverage you declined earlier, and spousal concurrence is required.

Withdrawal for a qualifying VA disability

A retiree may withdraw from SBP if the VA has rated a service-connected disability as totally disabling for 10 or more continuous years, or for at least 5 continuous years immediately after leaving active duty. The beneficiary must consent in writing, and the surviving spouse is entitled to a refund of premiums paid when the retiree dies. DFAS explains the reasoning: the survivor will likely qualify for Dependency and Indemnity Compensation from the VA.

Divorce, a spouse's death, remarriage

A divorce decree can require former spouse coverage, and either you or your former spouse must claim it in writing within one year of the divorce. If a covered spouse dies, that coverage ends and premiums paid after the date of death are refunded. If you were married at retirement, elected spouse coverage and later remarry, that coverage generally resumes for the new spouse on the first anniversary of the marriage unless you decline within that first year.

SBP and VA survivor benefits: the offset is gone

For years, a surviving spouse who received both SBP and the VA's Dependency and Indemnity Compensation (DIC) had the SBP annuity reduced by the DIC amount, known as the SBP-DIC offset. That changed. The offset was cut to one-third of DIC on January 1, 2022, and eliminated on January 1, 2023. Beginning February 1, 2023, surviving spouses receive their full SBP payment from DFAS and their full DIC payment from the VA. The Special Survivor Indemnity Allowance, which existed to soften the offset, ended with the January 2023 payment.

This matters for anyone who decided against SBP years ago on the assumption that DIC would wipe it out. That assumption no longer holds.

Remarriage of the surviving spouse

A surviving spouse keeps SBP for life as long as they do not remarry before age 55. Remarrying before 55 stops the annuity, but if that marriage later ends for any reason, eligibility is reinstated from the first day of the month the marriage ends. Remarrying at 55 or older does not stop it.

When the retiree dies: what the survivor does

Someone must notify DFAS as soon as possible. Retired pay ends on the date of death, and late reporting can create an overpayment that DFAS collects from the bank, the estate or a survivor, and can delay the annuity and any arrears of pay. Once the death is reported, the beneficiary receives a Verification for Survivor Annuity form (DD 2656-7), and the annuity starts after DFAS receives it. DFAS suggests printing its instructions and giving a copy to your beneficiary now. One more detail: naming someone for SBP does not make them your beneficiary for arrears of pay; that takes a separate designation.

State taxes on SBP payments

Many states that exempt military retired pay extend the same treatment to Survivor Benefit Plan annuities, and several name them directly, among them California, Louisiana, Virginia and Wisconsin. Where a state's documents are silent, ask its revenue department before assuming. The guide to which states tax military retirement pay has a section on survivor payments, and each state's page quotes its rule.

A checklist before you sign

1. Read DFAS's advantages and disadvantages page together with your spouse, and decide together; a reduced election needs their notarized signature anyway.
2. Price full coverage: 6.5% of your expected retired pay, for up to 360 months and at least to age 70.
3. Compare it with what your survivor would need and what other savings and life insurance would provide.
4. If you have children, decide on child coverage now; declining it cannot be undone for children born later.
5. If a divorce decree mentions SBP, follow its deadlines exactly: one year.
6. Make a separate arrears of pay designation, and give your beneficiary DFAS's instructions for reporting a death and starting the annuity.
7. Ask an SBP counselor to walk through your election before you submit the form.

DFAS notes that its pages explain typical situations and that the laws, financial management regulations and instructions govern the details. Check the current rules with DFAS and your retirement services office before you make the election.