Since your military pension ends when you die, you are trying to determine the most cost-effective way to replace that income. Your options are to either elect the Survivor Benefit Program or secure enough life insurance coverage to replace the loss of your income.
Keep in mind that options come at a cost. Basic SBP will pay your spouse a benefit equal to 55 percent of your "designated base amount" - generally the same as your retirement pay.
For example if your retirement benefit is $3,000 per month, upon your death, your spouse receives $1,650 a month for life, adjusted for inflation. There is a cost to this benefit, typically 6.5 percent of your retirement amount. For a monthly benefit of $3,000, the cost would be $195 per month. Because that premium comes out of your before-tax income, you receive it at a discount. For example, if you are in the 25 percent tax bracket, the net premium cost is 4.9 percent. SBP premiums stop after 30 years and by age 70.
Next, let's look at life insurance. First, determine how much coverage would replace that portion of the lost income. Using the $3,000 a month example, you would be replacing a monthly benefit of $1,650 or $19,800 per year. This would require a $495,000 investment portfolio that would generate $19,800 (at a 4 percent withdrawal rate) each year. That means you would need approximately $500,000 in life insurance.
A good rule of thumb: The life insurance premium would need to be lower than the monthly cost of your SBP.
Remember that the SBP benefit would be increased by the cost-of living-adjustment. If you elect to carry life insurance instead, the investments that house the life insurance proceeds would also need to keep up with inflationary costs.
There is no simple answer. It boils down to your spouse's comfort level in dealing with the responsibility of prudently managing the life insurance proceeds, as opposed to receiving a guaranteed life-time stream of income in the form of an SBP. I suggest that you look beyond cost analysis; the ultimate answer rests upon a solution that gives you and your family peace of mind.
Denisa Tova MBA, CFP, CFDP(TM), ChFC, CLU provides divorce financial expertise to divorcing individuals. She is a Certified Financial Planner(TM) practitioner and Certified Divorce Financial Analyst. You can find more information about Denisa Tova at: http://www.denisatova.com
Reprinted with permission of The Colorado Springs Gazette
