(This article originally appeared in the December 2022 issue of Military Officer, a magazine available to all MOAA Premium and Life members. Learn more about the magazine here; learn more about joining MOAA here.)
Certain military retirees who are rated 100% disabled by the VA may have the option to terminate their Survivor Benefit Plan coverage. This may seem like a logical choice in situations where it is likely that survivors will receive Dependency and Indemnity Compensation.
However, there are several factors to consider to ensure that survivors will still have adequate income if the retiree predeceases them.
If you are considering opting out of SBP based on disability, don’t forget that the rules about SBP and DIC have changed. The new rules, which will allow a survivor to receive full SBP and DIC payments, will be completely phased in on Jan. 1, 2023. Families who considered discontinuing SBP coverage in the past may think differently now that survivors can receive the full amount of both benefits.
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The Survivor Benefit Plan, or SBP, is the premium-based annuity that provides a continuation of military retirement pay to eligible survivors. Military retirement pay ends with the death of the servicemember. By purchasing SBP coverage at the time of retirement, the retiree can ensure a stream of income for their eligible beneficiaries.
Dependency and Indemnity Compensation, or DIC, is the VA benefit for eligible survivors of certain veterans who:
- Died while on active duty, active duty for training, or inactive-duty training.
- Died from a service-connected illness or injury, as determined by the VA.
- Have a service-connected VA disability rating of totally disabled for either a) at least 10 years before their death, or b) continuously since their release from active duty and for at least five years immediately
before their death.
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Electing SBP coverage is generally irrevocable, with few exceptions. One of those exceptions applies to veterans who meet the last criteria. Because their survivors will qualify for DIC, these families may wish to discontinue SBP coverage.
Pros and Cons of Opting Out of SBP Coverage
If you’re a veteran who meets the disability criteria to stop SBP coverage, you first need to consider whether you have any legal obligations that would require you to maintain SBP coverage. This would likely be a divorce decree that obligates you to maintain SBP for the benefit of your former spouse or for your former spouse and children.
Then you should look at the pros and cons of stopping SBP coverage. The advantage of stopping coverage is that you’ll save the monthly SBP premium. SBP premiums are 6.5% of the covered amount of military retirement pay.
However, giving up SBP coverage will reduce the amount of income for your survivors. For most families, SBP income is a vital part of their estate plans.
Any decision to discontinue SBP should be considered very carefully. Be sure to factor in debts, assets, obligations, and other streams of income.
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The Value of SBP and DIC
In 2022, the basic DIC rate for a surviving spouse is $1,437.66 per month. That amount may be increased for children and/or certain special situations. The DIC payment rate receives an annual cost-of-living adjustment. DIC payments are tax-free.
SBP payments are 55% of the covered amount of military retirement pay. Most SBP coverage is for the full amount of military retirement pay, though the servicemember and spouse may have elected reduced coverage at retirement.
SBP also receives an annual cost-of-living adjustment. SBP payments are federally taxable income to the recipient.
Elimination of the Offset
In the past, it may have made more sense to opt out of SBP if you anticipated that your survivor was going to receive DIC. This was because federal law did not allow survivors to receive the full amount of SBP and DIC. SBP benefits were reduced, or offset, by the amount of DIC received. Recent changes to the law fix that. The phased-in elimination of this offset will be complete on Jan. 1, 2023; eligible survivors will receive the full amount of DIC and the full amount of SBP.
The decision to stop SBP coverage is irrevocable unless your VA disability rating decreases. If that happens, you have one year to restart SBP coverage.
If you decide to disenroll in the SBP, you must submit the SBP Withdrawal Consent Form to the Defense Finance and Accounting Service. It’s important to note that the current beneficiary or beneficiaries must provide written consent to stop SBP coverage.
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For most situations, the inflation-adjusted income provided by the Survivor Benefit Plan is an important part of a family’s estate plan. Removing that stream of income should only happen if the rest of the plan will provide for the survivors. However, for those who genuinely do not need the coverage, there is the option to stop SBP if the retiree meets the disability criteria.
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