MILITARY UPDATE: Survivor plan is a good value

A typical officer retiring today who declines to enroll in the Survivor Benefit Plan lets the government off the hook for a subsidy worth $50,100 in “net present value,” say Department of Defense actuaries.The typical enlisted retiree who chooses not to enroll in the plan is turning down a subsidy toward their spouse’s financial well-being with a net present value of $22,300.Net present value is the dollar amount a new retiree would have to invest at time of retirement so that, when combined with monthly premiums, it would build an annuity for the surviving spouse of equal in value to the benefit plan.This is one yardstick to measure the value of the plan. Here’s another: A 40-year-old retiree with a 38-year-old wife who elects full Survivor Benefit Plan coverage on a $2000 monthly retirement could expect to pay $62,000 in premiums if he died at age 65. If his widow were to live just seven more years, until she reaches 70, she would receive $401,897 in benefits.Anita Hattiangadi and Lauren Malone, scientific analysts for think tank CNA, used this last example in a Sept. 30 memorandum to the Marine Corps’ deputy commandant. The memo suggested that too many retiring Marines are opting out of the benefit plan and likely won’t get another chance to sign up.The Survivor Benefit Plan is great deal, say pay officials. That’s been particularly true since Congress eliminated a sharp reduction in plan annuities that occurred at age 62 when surviving spouses became eligible for social security.Despite the plan’s recent improvements, including a premium “paid-up rule” after 30 years and attainment of age 70, many retirees, with consent of their spouses as the law requires, turn down coverage. The acceptance rate is particularly disappointing among new retirees from the sea services.Sign-ups rates in fiscal 2008, the latest data available, show that only 68 percent of married Navy members and 70 percent of married Marines elected coverage as they retired. By contrast, 85 percent of new Army retirees and 82 percent of new Air Force are buying coverage.The results suggest that the sea services aren’t doing enough to educate their retiring members and spouses on the benefit plan.Why is it such a good deal? For starters, the government subsidizes 47 percent of the cost, said Gary McGee, assistant director for military pay policy in the office of the secretary of defense.Commercial life insurance plans aren’t subsidized. Indeed, insurance companies set their rates at least high enough to make a profit.McGee calls the plan a “great” benefit. Enrollees pay premiums equal to 6.5 percent of monthly retired pay. These are “before tax” dollars, which is an advantage over premiums paid for commercial insurance which are after-tax dollars. “This can make a significant difference,” McGee said.If a member dies before the spouse — a probability of about 68 percent given relative ages and gender differences — the surviving spouse gets an annuity equal to 55 percent of covered retired pay.|“I don’t really envision anybody who should opt out of this unless they think by taking that 6.5 percent (of) retired pay, they could invest that some place where they could get a return equal to the amount of subsidization, which is nearly 50 percent,” said McGee.The Defense Department’s Office of the Actuary calculated the average value of the Survivor Benefit Plan for a typical officer and enlisted retiree.An Army lieutenant colonel retiring at 42 has a life expectancy of 83 years. Assuming his wife is age 40 at his retirement, the net present value of benefit plan premiums paid over the retiree’s lifetime is $48,500. The net present value of the annuity payable to the surviving spouse, given her longer life expectancy to age 91, is $98,600.So the present value of the government’s subsidy is $50,100.An equivalent insurance payout for this officer retiree would need to be $590,000 to match the value of SBP.Life expectancy for an Army sergeant 1st class retiring at age 38 is 79 years. Assuming his wife is 36 when he retires, net present value of premiums paid over the retiree’s lifetime is $27,700. The present value of the survivor plan annuity payable to the surviving spouse, given her life expectancy to age 90, is $49,000.So the net present value of the government subsidy for the benefit is $22,300.The equivalent commercial insurance payout at the retiree’s death would need to be $350,000.