MoneyLife

Survivor Benefit Plan vs Life Insurance: Which One Should You Choose?

By Marc Guberti
survivor benefit plan vs life insurance

Life takes many unexpected turns. No matter what happens, you’ll want to know that your loved ones are financially secure. The survivor benefit plan vs life insurance debate unveils two popular ways to provide your beneficiary with a financial safety net. Let’s jump into the differences between life insurance and survivor benefit plan coverage.

What is a survivor benefit plan?

Survivor benefit plan coverage gives your family inflation-adjusted annuities in the event of your death. Although no one wants to die early, it can happen. If your family depends on your salary to cover all expenses, it makes sense to provide them with a financial safety net.

What is life insurance?

Now that we’ve introduced the first side of the survivor benefit plan vs life insurance argument, let’s move on to life insurance. Similar to survivor benefit plan coverage, life insurance allows you to select one or multiple beneficiaries who will receive a payout when you die. 

Not all life insurance plans are the same, so it’s essential to consider your choices.

Comparing survivor benefit plan vs life insurance

Now that we have a basic understanding of survivor benefit plan vs life insurance, let’s jump in and look at some critical differences. Understanding these differences will assist you in your decision-making process and help you pick the right plan for your family.

Payment Source

The payment source of a survivor benefit plan is similar to that of social security. The ability to continue receiving payments depends on the next generation also investing money into the program. 

As long as each future generation supports the program, your payments are reliable. However, if future generations stop paying into survivor benefit plan coverages, problems can emerge later on down the road.

Life insurance companies operate differently. While part of the payout of life insurance depends on people continuing to take on life insurance plans, the insurers invest the proceeds into low-risk assets that yield returns while they wait to pay people out. 

Furthermore, some people’s policies expire before the payout. For example, some term life insurance policies expire prior to people’s death, meaning their beneficiaries never end up receiving the payout. 

This won’t ever happen with a survivor benefit plan. Life insurance companies strive to make a profit from their policies, especially term life insurance. On the bright side, the survivor benefit program does not have profit as its main goal.

Payment Schedule

Life insurance and survivor benefit plan coverage each have different payment schedules. Although life insurance presents the payout as a single lump sum, a survivor benefit plan provides a lifetime annuity for dependents. The annuity payments decrease the likelihood of a beneficiary squandering the money.

Furthermore, a survivor benefit plan’s payouts adjust to inflation. This same luxury isn’t relevant for life insurance payouts. It’s important to consider inflation because it is an essential factor in payout payments. 

For example, a $500,000 payout won’t mean as much 20 years from now. On the bright side, survivor benefit plan coverage allows you to evade this headache.

Taxing

The contributions you put towards your coverage add up over time. Budgeting for these expenses will save you from headaches in the future, but only one of them helps you with taxes. Payments towards a survivor benefit coverage plan are tax-deductible. That means you pay for the coverage using pre-tax dollars. 

Tax deductibles give you more for your money and they result in lower taxes as well. The more tax deductibles you can get, the better. Survivor benefit plan coverage aids in the goal to accumulate tax deductibles.

Uncle Sam has a different view on life insurance. Since life insurance is considered a personal expense, those premiums are not tax-deductible. Life insurance premiums erode your post-tax dollars, but the policy coverage can still provide peace of mind. 

If your budget is tight, keep the taxing element in mind. If you miss a single life insurance premium, your entire policy can become void. As such, it’s crucial to stay on top of your payments.

Health Conditions

Pre-existing health conditions play a significant role in the survivor benefit plan vs life insurance debate. While health conditions play no role in survivor benefit plan coverage, they can spell disaster for a life insurance policy.

Pre-existing health conditions will increase your life insurance premiums. Certain health conditions will affect your eligibility for life insurance policies or the ability to renew a term policy. 

Your insurer will ask you to complete a medical exam to assess your current health. Anyone who refuses will either be ineligible for the policy or face steeper premiums. 

Someone with pre-existing health conditions should heavily consider survivor benefit plan coverage in favor of life insurance. The premiums can rack up quickly especially if you have pre-existing health conditions.

Unhealthy behavior and hobbies will also increase the premiums you pay towards your policy. These obstacles are not present for survivor benefit plan coverage.

Beneficiaries

Under a survivor benefit coverage plan, a child can lose eligibility for payouts once they turn 18, or in the event that the child is a full-time student, the eligibility is lost once the child turns 22. 

To regain eligibility, the fallen hero’s spouse will lose eligibility by either dying or remarrying before turning 55. Life insurance policies do not cause these same headaches. 

You can list anyone as a beneficiary, including a family member, a friend, or a charity organization. You can split the payout between beneficiaries and decide how each beneficiary receives their payment, too. 

While the annuities decrease the chances of a beneficiary squandering the money, they may need the lump sum upon your death. Replacing your income is no easy feat for a grieving spouse. The lump sum life insurance payout addresses this issue.

Closing The Loop On Survivor Benefit Plan Vs Life Insurance

Life insurance isn’t for everyone, and neither is survivor benefit plan coverage. Both plans make it possible for you to provide money for your loved ones in the event that you die. They offer an extra layer of security and help to fortify your financial safety net.

MoneyLion can help boost your financial safety net. For only $1 per month, you can auto-invest into your financial portfolio through RoarMoney. 

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