The Survivor Benefit Plan (SBP) is an excellent way to protect a portion of your income for your spouse when you die. But that is all it protects, just a portion.
While it’s great that the government offers this program, it may not provide you or your spouse with the coverage you’ll need, and you may want to seek out other solutions to fill in the gaps to meet your retirement goals.
It’s essential to understand how the Survivor Benefit Plan and life insurance work so you can develop a comprehensive strategy for utilizing both, providing you and your spouse with the ultimate income protection.
Survivor Benefit Plan vs Life Insurance
There are six main areas of difference between the government Survivor Benefit Plan and private life insurance.
- How to qualify?
- Coverage availability
- How is it paid for?
- Who can be the beneficiary?
- How is it paid out (upon death)?
- How is it taxed?
Survivor Benefit Plan
How do I qualify for the SBP?
In order to qualify for the SBP in retirement, all you have to do is elect it on your retirement application. You do not have to show medical records, go through a health screening, and they don’t ask if you are a smoker. This is an advantage of the SBP, especially if your health may prevent you from qualifying for private life insurance.
SBP Coverage
There’s a cap on the coverage available from the Survivor Benefit Program. As a CSRS retiree, you will receive 55% of your pension; as a FERS retiree, you will receive 50% of your pension. The percentage will remain unchanged, but the monthly payout amount is likely to increase over time due to COLA adjustments.
How is the SBP paid for?
The SBP will be paid for from your monthly pension, and the cost increases over time. This is because you’re locking in your percentage, rather than a dollar amount for the cost.
Who can be the beneficiary of the SBP?
The beneficiary can be a spouse or a former spouse, by court order.
How is the SBP paid out (upon death)?
Upon death, monthly payments are made for the duration of your spouse’s lifetime.
How is the SBP taxed?
Under the Survivor Benefit Plan, everything that your spouse receives from this plan is fully taxable to them.
Private Life Insurance
How do I qualify for private life insurance?
In order to have private life insurance, you must be healthy enough to qualify. Private life insurance companies usually require medical records, medical exams, and will ask about tobacco use, for example.
This may be one of the challenging points of private life insurance, but understand that if the company is going to be willing to make a payout upon your death, they need to know you’ll be around a while to pay the premiums.
Private Life Insurance coverage
There’s almost an unlimited amount of coverage available with private life insurance. However, the amount of life insurance available to you can depend on several factors, including income, health, and age.
How is Private Life Insurance paid for?
Private Life Insurance premiums are typically paid on a monthly basis. And most often, the cost is the same every month. There are some payment options where the premium will fluctuate up or down. Be sure to inquire about payment options when purchasing private life insurance.
Who can be the beneficiary with Private Life Insurance?
Under a private life insurance policy, you can name any person or entity you wish to be the beneficiary.
For example, when you first signed up for the policy, you likely chose your spouse as the beneficiary. But if your spouse were to predecease you, you can name your children as a contingent beneficiary.
How is Private Life Insurance paid out?
Private life insurance is paid to the beneficiary in one lump sum at the time of the policyholder’s death.
How is Private Life Insurance Taxed?
All life insurance proceeds are income-tax-free under a private life insurance policy. The beneficiary will receive their payout with no additional fees deducted, such as taxes. They simply receive all of that money right up front. This is one of life insurance’s greatest advantages.
Think About Your Strategy
Most often, federal employees are seeking a genuine strategy. They are searching for a combination of government and private sector solutions, aiming to achieve the best of both worlds.
They might elect to take the minimum survivor benefit to lock in health insurance, as well as a portion of that income. Then they may opt for a private life insurance policy that supplements what they’ve given up under the Survivor Benefit Plan.
There are advantages and disadvantages on both sides. The good news is that you don’t have to pick and choose. You get to have both.
A strategy like this—where you balance the private sector and government solutions—requires skillful execution from a competent professional who specializes in helping federal employees.
Visit with a financial professional who has comprehensive knowledge of the Survivor Benefit Plan and can help you establish a life insurance policy you feel confident about.
Watch this webinar, The Strategy of the Survivor Benefit Plan, for a full take on the SBP and strategies to make it work for you.
About Chris Kowalik
Chris Kowalik is a federal retirement expert and frequent speaker to federal employee groups nationwide. In her highly-acclaimed FedImpact Workshops, the FedImpact Podcast, and the FedImpact Webinars, she empowers employees to make confident decisions as they plan for the days when they no longer have to work. Chris’ candid and straightforward nature allows employees to get the answers they need and understand the impact these decisions have on their retirement.
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