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Financial Security After a Retired Spouse Dies

Will you have financial security if your retired spouse dies before you?

Nobody likes to talk about the worst-case scenario. But when it comes to retirement, it is a conversation that every couple should definitely have.

Most of us are familiar with life insurance. There are several different types, but in general a life insurance policy pays a lump sum amount upon the insured person’s death.

Every active duty military member is automatically enrolled in Servicemembers’ Group Life Insurance, commonly known as SGLI. But that insurance disappears when you leave the military. The “replacement” insurance – Veterans’ Group Life Insurance or VGLI – is a similar program.

It’s important to note that VGLI has no requirement for proof of good health or health screenings if you enroll within 240 days of separating from the military. Why is this important? Because many civilian life insurance providers will deny coverage to veterans with a high disability rating or certain health conditions.

The Survivor Benefit Plan is also another option offered to retirees. SBP pays the beneficiary up to 55 percent of the retiree’s pay – for life. Without it, a spouse or children of a retiree would receive nothing in terms of pay. Note: It’s a common misconception that retirement pay continues automatically to the surviving spouse upon the retiree’s death. Not true. Retirement pay stops immediately when the retiree dies.

A few things to note about SPB: A spouse must be present at signing if the retiring servicemember declines coverage, and there is only one very limited window to cancel once you sign up.

Whether to buy life insurance or increase your existing coverage, or take SBP, or some combination of the two, are hefty decisions.

We compiled a short list of (very) frequently asked questions to help you get started with this difficult conversation and wade through the options. We also enlisted Kate Horrell, a financial educator, coach and counselor who focuses on military families, to lend her expertise.

What is the difference between SBP and life insurance?

The answer to this one is pretty simple, although the two are very different products. SBP pays a monthly income to the beneficiary for life. Life insurance is a one-time lump-sum payment.

“If you want that lump sum to provide a stream of income, you will have to invest and/or manage it (or find someone trustworthy to do it for you),” Horrell said. “SBP pays a stream of income.”

Some people balk at the cost of SBP, which can be several hundreds of dollars a month for high-ranking retirees who choose the full 55 percent coverage. But Horrell believes SBP is “super cheap for what you are getting,” specifically because SBP includes annual cost of living allowances and the income continues for the life of the beneficiary.

What are some important factors to consider when purchasing life insurance?

Horrell advises that shoppers consider the stability of the company from which you purchase life insurance and the details of the policy (does it have a war clause, a suicide clause or other limitations that might be a factor in your situation. Also, she says, ask yourself how much coverage you really need.

Do I need life insurance?

The answer to this depends a lot on your personal situation, specifically if you have children or whether your spouse could support his/herself without it. It also depends on your own financial assets.

“There are lots of situations where someone may not need life insurance,” Horrell said. “If no one is depending on your income, you don't need life insurance. If your dependents have other sources of benefits or enough revenue to cover their expenses, you don't need life insurance.”

What are some of the most important factors to think about when considering SBP?

The same criteria from the above question – personal financial situation and family situation – also apply here. Also take into consideration the age of your children, if anyone in your family has special needs, and how much (if any) life insurance you have. Also consider what other streams of income surviving family members might have, and analyze how much more money (if any) would be needed on a regular basis.

Horrell says you should ask yourself these questions: “What does your family actually need, and how will their needs change over time? If you don't need the full amount of SBP for a lifetime, would an insurance policy ‘fill the gap’ appropriately and at a lower cost?”

Which should I choose – SBP or life insurance?

“In general, my advice for SBP vs. life insurance is that they are not an either/or question,” Horrell said. “They are very different products that provide very different benefits. A couple should analyze their needs and their thought patterns.”

Some people might feel most comfortable with a combination of the two. For example, Horrell said, a family might decide through their own needs analysis (or with the help of a financial advisor) to purchase a term life insurance policy in an amount that would cover a mortgage and college costs. The retiring servicemember might then decide to purchase SBP in an amount that would cover the rest of the monthly expenses, minus any other income sources.

“In my opinion, SBP is a better tool for a stream of income and life insurance is a better tool for fixed costs like mortgages and college costs,” Horrell said.

“In most cases, a combination of the two is a much better choice than one vs. the other.  SBP to provide long-term income, life insurance for shorter-term needs.

She advises those looking at their options to consider the “sleep-at-night factor.”

“What will help your survivors sleep at night? This is an emotional decision as well as a financial one.”

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