Survivors Benefit Plan: Is the SBP the Best Way to Insure Your Interest in Your Former Spouse's Military Retirement?

The Survivor Benefit Plan ("SBP"), Reserve Component Survivor Benefit Plan ("RC-SBP"), and Retired Serviceman's Family Protection Plan ("RSFPP") provide military servicemembers with the opportunity to purchase an annuity that pays a defined benefit to certain eligible beneficiaries upon the death of the servicemember.  The annuity pays a percentage of the servicemember's retirement pay on a monthly basis for the lifetime of the beneficiary.   

Upon death, the servicemember's right to receive military retirement pay terminates.  The annuity is a form of insurance that provides coverage in the event that the servicemember predeceases the beneficiary.  This coverage can provide an eligible beneficiary with up to 55% of the servicemember's monthly military retirement pay.

Although there is no cost associated with SBP during active duty service, SBP coverage comes at a premium after retirement.  SBP coverage for a retirement pay annuity can cost as much as 6.5% of the servicember's gross retired pay.  Fortunately, the SBP premium is deducted from retirement pay on a pre-tax basis.  In other words, the servicemember is not taxed on the portion of his or her income used to pay the SBP premium.  

Once a beneficiary starts receiving SBP annuity payments, the payments are adjusted each year based on the Consumer Price Index. This is known as a Cost of Living Adjustment or "COLA."  According to the Defense Finance and Accounting Service, to "earn an even return on your investment, your beneficiary typically must receive payment for seven months for every five years you pay SBP premiums."

Subject to certain exceptions, the servicemember must elect SBP coverage at the time of retirement.   This is done using DD Form 2656, Data for Payment of Retired Personnel, which includes the SBP election. Although the servicemember's SBP election is frequently irrevocable, there are circumstances where a servicemember can change his or her SBP election.  

If you are a military servicemember going through a divorce, chances are that your former spouse will demand a share of your military retirement.  And, chances are the former spouse will also demand that you make an SBP election with the former spouse as the exclusive beneficiary.  

During the divorce, the spouse should consult a military divorce attorney to understand whether the Survivor Benefit Plan is the best means to insure the spouse's interest in the service member's military retirement.  For example, many attorneys that practice military divorce will automatically demand that the servicemember elect to use the Survivor Benefit Plan ("SBP") to secure the spouse's interest in the military retirement.  

In some cases, the attorney will demand SBP coverage even when it makes absolutely no sense.  Absent a reimbursement mechanism, the cost of SBP coverage is necessarily shared on a pro-rata basis between the servicemember and former spouse.  This is because the former spouse only has a right to receive a share of the servicemember's disposable retired pay.  See 10 U.S.C. § 1408.  And, many supposed military divorce attorneys do not even know that a former spouse who remarries before she reaches age of 55 is not an eligible beneficiary under the Survivor Benefit Plan.  See 10 U.S.C. § 1450(b)(2).  In other words, a former spouse with plans to remarry may end up financing an insurance policy that will never pay her a dime.  

Inexperienced attorneys will pound the table demanding this expensive insurance, the benefit of which may ironically go to the servicemember's new spouse if the former spouse remarries.  How many clients would be excited to buy insurance only to find that they will receive no benefit if they remarry?  A competent military divorce attorney should ask the spouse whether he or she is likely to remarry or has plans to remarry (some spouse's have already selected their new partner before the divorce is even finalized).  If the spouse has plans to remarry, then a life insurance policy is probably a much better option than SBP coverage.

If you are a former spouse and the court orders that the servicemember insure your interest in the retirement using SBP, make sure that you file the appropriate forms with DFAS to make a deemed SBP election.  An experienced military divorce attorney representing a servicemember's spouse will always advise the spouse to file the SBP Request for Deemed Election with DFAS.  Do not trust the servicemember to do this.  If the former spouse does not make this election within one year of the date of the court order dividing the military retirement, the right to SBP coverage may be forever waived.

Changing Your SBP Coverage and Election

People are accustomed to routinely changing their election of benefits.  Most companies provide employees an opportunity to change their benefits at least once a year.  Employees also frequently have an opportunity to change your elections based on certain major life events, such as marriage, the birth of a child, or divorce.

If you are a military servicemember who is at or near retirement, you should be very careful when you make your election concerning coverage under the Survivor Benefits Plan ("SBP").  SBP is an annuity payable to certain eligible beneficiaries in the event the servicemember dies and is thus no longer eligible to receive military retired pay.  SBP has many advantages and disadvantages, which may or may not be right for everyone.  SBP allows eligible beneficiaries to receive up to 55% of the servicemember's retired pay.  SBP also comes at a cost:  SBP premiums may be as high as 6.5% of the Servicemember's retired pay for up to 30 years.

The SBP election is irrevocable, except as specifically provided by statute.  See 10 U.S.C. § 1448(a)(4)(D).  Retirees who waive SBP or elect coverage at less than the maximum amount typically have no right or ability to change that election.  This is true even if you go through a divorce.  For example, if you waived SBP at retirement, neither your spouse nor the divorce court can force you (or DFAS) to change that election.   This is somewhat fair, of course, because spousal consent is required for any waiver or reduced election.   See 10 U.S.C. § 1448(a)(3)(A).

Congress did provide some exceptions to the general rule that the SBP election is irrevocable.  If the beneficiary dies, coverage automatically terminates.  If you marry for the first time or have a first child after retirement, you can add the new family member as a beneficiary.  See 10 U.S.C. § 1448(a)(5)(A).  To make this election, submit DoD Form 2656-6 and supporting documentation to DFAS Retired and Annuitant Pay within one year of the qualifying event.  If you were married and elected coverage for your spouse at retirement, unless there is a court order to the contrary, you can notify DFAS at any time of your remarriage and a new spousal election will automatically begin effective one year after that marriage date.  See 10 U.S.C. § 1448(a)(5).  Spousal concurrence must be obtained to begin coverage at any level lower than the original spousal election.  If you were married at retirement and elected not to cover your spouse, you cannot ever cover a subsequent spouse.

During the third year of retirement (i.e., between months 25 and 36), a retiree may elect to cancel SBP coverage.  See 10 U.S.C. § 1448a(a).  To make this election, submit DoD Form 2656-2 to DFAS Retired and Annuitant Pay with spousal consent (if applicable).  In the event of a divorce, you are free to terminate your coverage unless the final judgment or decree requires you to maintain SBP coverage.  If you are already participating in the SBP and you agree to continue SBP coverage for you former spouse or the court directs you to do so, you or your former spouse must make the election within one year from the date of the final judgment or divorce decree.   See 10 U.S.C. § 1448(b)(3)(A).  To do so, you or your former spouse must submit DoD Form 2656-1.

If you do not qualify for any of the aforementioned exceptions and you would like to change your SBP election, your only hope is that Congress declares an "Open Season" for changing your SBP election.  The DFAS website indicates that the last time Congress authorized an Open Season was 2005.

If you have questions about dividing military retired pay in a divorce or other questions concerning military divorce, please contact a military divorce attorney.