How Much Life Insurance Do You Need?

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A reader writes:

Hey Nords! Hope all is well. Update: I got denied for TERA and promptly got an assignment (my first choice) 24 hours later, so I can’t complain too much.

Question for you if you don’t mind. I’ve got SGLI and a $100K policy on my wife as well. I’ve generally steered clear of life insurance. What’s your opinion on the topic? USAA does their best to tempt me, but I’m still not convinced we need it, especially after I retire. Your thoughts?

 

First, a side note about TERA: Last year this reader asked a question about keeping their morale up for the final five years before military retirement. When their service opened up applications for the 15-year Temporary Early Retirement Authority, he applied for it. The smaller military pension would have meant a few years of a bridge career to reach financial independence, but he was willing to take the opportunity. However the services use TERA as a force-shaping tool and his skills are still in demand, so his application was turned down. At least the assignment officer didn’t hold a grudge, and the reader used this opportunity to thoroughly review their finances and their lifestyle. This new duty is “good enough” for now, and they can revisit the decision in a couple of years.

Now let’s talk about life insurance.

Like all insurance, life insurance is for catastrophes where you can’t afford to self-insure. Nobody enjoys shelling out perfectly good money for life insurance that they’ll never use, but it certainly helps the survivors sleep better at night. I think humans also have a huge behavioral psychology block at accepting our mortality, which makes us reluctant to investigate life insurance.

One way to get past the mortality issue is by asking your spouse how much money they want to have in the bank account after you’re gone. Some guys (and it’s almost always guys) feel obligated to carry enough to set their spouses up for years, possibly even for life. That may also be more money than the couple can afford to spend on insurance premiums. Some parents want enough insurance to handle years of childcare plus the college fund. (Again, that may dramatically reduce their savings rate and extend their journey to financial independence.) Many frugal couples opt for just enough insurance to pay for childcare or until the surviving spouse can resume their own career. They choose not to try to save for their kid’s college degrees but rather let the teen figure it out with scholarships and work/study.

I would not use life insurance for a survivor to “win the lifestyle lottery” or as an investment. I don’t want to include insurance premiums in our budget only so that I’d be worth more dead than alive. In financial terms, I’d use life insurance only to hedge our human capital while it was needed to support someone.

Here are some practical insurance examples from three generations of Ohana Nords.

 

Starting your military career

Our daughter just commissioned last month and reported aboard her first ship. She’s single with no kids, and nobody will suffer financially if she’s not around– so we suggested that she decline Servicemember’s Group Life Insurance. If she marries then she and her spouse would have to decide what expenses would need covering if one of them died. If they both have careers then they could decide not to insure each other until they have financial responsibilities like a mortgage or kids. If one of the married couple is unable to work (due to disability or chronic health issues) then the other should carry enough insurance to provide support (perhaps a lifetime annuity) beyond Social Security Disability Insurance.

 

During your career

Nearly 30 years ago my spouse and I were a dual active-duty couple when we married, and we declined SGLI until we became parents. (We could cover our mortgage on one income.) When we were raising our daughter, we each carried SGLI on each other to cover the childcare and the college fund. (In that order.) When my spouse left active duty for the Reserves (our daughter was eight years old), we had a long discussion about insurance. I kept my SGLI and we dropped hers because I was only about 18 months away from my pension. We were financially independent, I could cover childcare out of my salary, and the college fund was on track. If I died then insurance would give my spouse enough savings (along with her Reserve drill pay) to cover childcare and replace most of my pension until our daughter was 18 years old. Otherwise we felt that we had enough assets to self-insure.

 

After your career

When I retired from active duty, I dropped my SGLI. We were financially independent, the college fund was still on track, and our living expenses were actually dropping. The only other insurance decision that we discussed was on our pensions– the military’s Survivor Benefits Plan.

When I retired in 2002 it was already apparent that my spouse would have her Reserve pension in 2022 (at age 60), so she decided not to carry SBP on my pension. (By law, SBP is the choice of the surviving spouse.) The premium is “only” 6.5%, and it wouldn’t break our budget, but the SBP payout would not make a lifestyle difference. We’d rather have that money to spend on ourselves now. Another dual military retiree couple opted to decline SBP and carry term life insurance on each other until they reached age 70, when they’d drop the policies and start their maximum Social Security payouts. They chose this option because they only wanted about 25 years of cheaper term insurance instead of paying SBP premiums for 30 years.

SBP is a wonderful insurance policy because half of the premiums are subsidized by the federal government, but if you’re financially independent and the payout does not change your lifestyle then you have no need to buy it in the first place.

The final reason for life insurance is estate planning, and most families use it to balance the inheritance of their heirs. For example one adult heir would inherit the family home (worth $400K) while the other would get the $400K life insurance payout. That’s considered better than forcing the heirs to divide up the real estate (and agreeing on the rest of the probate issues). Another estate-planning benefit of life insurance could pay the federal/state estate taxes or the cost of probate– the popular media stereotype for this situation is not having to sell the family farm or business to pay the taxes and probate fees. My spouse and I are planning to (1) spend enough money while we’re alive to avoid estate taxes when we’re dead and (2) use a revocable living trust to avoid probate fees.

 

Term, whole, or permanent life insurance?

In almost all of the examples above, I’d buy the cheapest policy: term insurance. Term is strictly insurance instead of a hybrid insurance/investment policy like permanent insurance or whole life insurance. The key to buying cheap insurance is making sure that you continue to save for financial independence and grow your ability to self-insure. If you’re saving money with a cheaper term insurance policy, then make sure you actually invest those savings instead of frittering them away on lifestyle.

Whole life is almost always a worse investment than “buy term and invest the premium difference”. Most people don’t have the discipline to invest the difference, so whole life (and its growing cash value) can become a form of forced savings for those who would otherwise save even less. If you’re managing your own finances and saving for financial independence, then you probably have the skills & discipline to use term insurance and skip whole life.

My father is another example of the frustration of a whole-life policy. When my brother and I were toddlers, my father bought whole-life policies and named us sons the beneficiaries. In the early 1960s that was probably considered a good investment (or at least a feel-good investment), but by the 1980s (as long-term interest rates began a 30-year slide) the invested funds of the policies were not supporting the premiums. Dad chose to pay more money into the policies to keep them active because they had a cash value– and because he was suffering from the sunk cost fallacy. When I started managing his finances in 2011, I found a two-inch stack of 25 years of correspondence between him and the insurance company. They were bickering over the policy cash values and the additional premiums required to maintain them– and I could tell how angry my father was. Today, as a cold-hearted financial engineer, I can see that Dad should have canceled the policies when he retired in the 1980s. (Or he should never have bought them in the first place.) My brother and I both had our own careers and didn’t need any support, and we wouldn’t have needed any extra funds to handle estate probate. (I wish he’d discussed it with us.) As a parent, though, I can understand the sentimental reasons that Dad would want to keep the cash value for “us kids” instead of cashing out the policies. After Dad maintained the whole life policies for over 40 years, another insurance agent talked him into converting them to a single-premium permanent policy. It’s permanently paid up but it will never gain any additional face value to offset inflation. His four decades of premiums have been a terrible investment– almost as bad as investing all of an IRA in CDs. It might even be worse than CDs because insurance companies invest most whole-life and permanent policies in long-term bonds.

 

Other insurance situations

Several of my friends have children with lifetime health conditions or disabilities. Their kids may receive some SSDI, state care, Medicare, or Medicaid benefits, but their parents are also heavily insured to fund a special needs trust for lifetime income. One of them was able to provide insurance with his military pension by using the SBP “insurable interest” benefit for adult (disabled) children.

Finally, if you were planning to leave the military but wanted Veteran’s Group Life Insurance during your bridge career, then it makes sense to have SGLI in effect before you resign. You’d be able to convert the SGLI to VGLI without a physical exam or underwriting, but VGLI is not always as cheap as term insurance. It’s simply easier for a veteran to purchase VGLI, especially if the veteran is concerned about a disability rating or a pre-existing condition.

 

Figure out your insurance needs!

If you’re trying to settle on a dollar figure then I’d balance USAA’s life insurance calculator (and premium quotes) against the life tab of the eHealthInsurance.com website and LifeInsuranceByJeff.com (Jeff Rose is a personal-finance blogger and CFP). They’ll help you estimate the amount of insurance you want. Then they’ll give you a wide range of quotes as well as the details of physical exams, pre-existing conditions, high-risk sports/hobbies, and underwriting. If you’re a member of MOAA or any other military support organizations then you’d also want to investigate their affiliated insurance programs.

So get over your mortality, think about your insurance needs, run the calculators and get quotes, and buy a policy if you need one!

 

A little insurance help?

After you help yourself with your insurance needs, I could use your help with other military readers.  This post will become part of an eBook about making good insurance decisions, and readers love the advice and personal stories of military families.  If you’d like to contribute your advice & stories to the eBook, then you’ll have a vote on what military charities receive the royalties (currently Wounded Warrior Project and Fisher House Foundation).  Please share in the comments below or contact me or e-mail NordsNords at Gmail!

 

 

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Related articles:

Military insurance: SGLI, VGLI, SBP, and other benefits

Reader Question On Veterans Group Life Insurance



WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

13 Comments
  1. Reply
    RP November 7, 2017 at 7:10 PM

    Are the proceeds from a term life insurance policy taxed?

    • Reply
      Doug Nordman November 8, 2017 at 8:45 PM

      Great question, RP! The answer is “No”: insurance proceeds are almost always free of taxes.

      I’m sure there are niche cases with trusts or estates over $11M, but the vast majority of beneficiaries receive tax-free proceeds.

  2. […] How Much Life Insurance Do You Need? – Military Guide – One of them was able to provide insurance with his military pension by using the SBP “insurable interest” benefit for adult … Doug. I like the thought process of considering “childcare, mortgage and college” to help determine if and how much life insurance one might need. […]

  3. […] A reader asks about the post how much life insurance is necessary: […]

  4. Reply
    Doug Nordman August 8, 2014 at 6:27 PM

    Here’s a comment by reader Kay that was apparently lost during a technical glitch:
    “Great article!

    Another dual military retired couple here . . . I remember agonizing over the term/SBP/VGLI decisions, and at the time we crunched all kinds of numbers.

    What we finally decided was to opt for “child only” coverage on both of our pensions. This was a very cost effective way for us to insure. We had our last kid late in life — so this coverage would carry either one of us into our 60′s. Yikes! By then the survivor would be close to collecting whatever SS we qualify for after a couple of decades of retirement.

    Hopefully we won’t need it, but it would provide enough of an income stream through our last kid’s college years that neither one of us would have to return to work.”

    Thanks, Kay! That’s a very good choice for retirees with kids.

  5. Reply
    Chris July 4, 2014 at 5:20 PM

    Great post Doug. I like the thought process of considering “childcare, mortgage and college” to help determine if and how much life insurance one might need.

    • Reply
      Doug Nordman July 5, 2014 at 6:25 PM

      Thanks, Chris!

      I think those are the right priorities, but everyone’s family is different and it’s a highly individual decision.

  6. Reply
    Brandi July 1, 2014 at 7:44 PM

    I just thought of a follow-up question to this article because it really got me thinking about getting rid of our SGLI coverage. What kind of benefits will a spouse or family receive if an active duty member dies? I found this report: http://militarypay.defense.gov/reports/qrmc/11th_QRMC_Supporting_Research_Papers_Files/SR15_Chapter_12.pdf

    It states that the survivors will receive a $100,000 death gratuity payable immediately. Also, it says that spouses are eligible to receive a pension under the Survivor’s Benefit Plan. To receive SBP benefits, the death has to be in the line of duty. But from what I can tell, the line of duty definition is pretty loose. The death of an active duty member is presumed to be in the line of duty unless the person was AWOL or doing something dumb.

    If all of these benefits are available, why carry a bunch of extra insurance? My husband and I have kept the $400,000 max SGLI coverage. I’ve always rationalized paying it because the premiums are reimbursed whenever we are deployed, so “lucky” for us, we usually only pay premiums for half the year. Plus our job is a little bit more dangerous than your average office work. But I think between the death gratuity and SBP, we’d each be more than set. Unless I am missing something?

    • Reply
      Doug Nordman July 4, 2014 at 5:16 AM

      Brandi,

      You’re correct on line-of-duty determinations. Even if the member was doing something dumb (perhaps related to fatigue or judgment or alcohol) there’s still the benefit of the doubt. DoD wants to avoid the perception of punishing the families for a servicemember’s mistake.

      The deceased servicemember’s Survivor Benefits Plan (different from the military retiree SBP) is based on years of service and assumes a retirement at 100% disability. Here’s the applicable paragraph from the DoD Survivor’s Guide (page 11) at
      http://www.gordon.army.mil/acs/SOS/Survivors%20Guide.pdf
      “Surviving spouses and/or children of service members who die in the line of duty while on active duty may be entitled to Survivor Benefit Plan (SBP) payments. Your casualty assistance officer will schedule a meeting with a retirement services officer who is an experienced counselor and can provide information about survivor benefits and help you with the applications. SBP payments are equal to 55 percent of what a member’s retirement pay would have been had he or she been retired at 100 percent disability.”

      The Chapter 61 disability retirement calculation is similar to a High-Three retirement: (High-Three pay base) x (disability %). However in this situation the % appears to be limited to 75% by law: http://militarypay.defense.gov/retirement/disability.html

      I’m weak on disability retirements, and I’m going to check on that 75%/100% contradiction, but this implies that the SBP payment would be (High-Three pay base)x75%x55%, or about 35%-40% of base pay. The survivors of an E-6>10 earning $3331.50/month base pay would receive roughly $1325/month or under $16K/year. For a junior servicemember the SBP amount could be even smaller (and still subject to income tax) when compared to the income that could be generated by a $400K SGLI insurance settlement. Of course the survivors are still eligible for Dependent’s Indemnity Compensation, months of medical benefits, base/commissary/exchange access, and other compensation.

      If this small SBP payment (and other benefits) would cover your survivor expenses then yes, you could cancel SGLI. The SGLI premiums (now 7 cents per $1000, plus the $1/month for TSGLI) are as much as $29 per month per servicemember. However there’s still the sleep-at-night comfort that comes from having another $400K of life insurance at a very affordable rate of less than $350/year. If your premiums are reimbursed for deployments then you’re only saving ~$175/year per person. You’re perhaps very close to financial independence (congratulations!) and I realize that (unlike most people) you’ll save/invest any SGLI premiums that you’re not paying– but you have to decide whether saving that relatively small amount is worth self-insuring for this risk.

      Considering the grief and disruption that’s caused by a servicemember’s death, I think it’s worth keeping the SGLI until military service is over. Even then it may be worth keeping life insurance (VGLI or some other term policy) until the insured is completely finished earning a paycheck. Finally, military retirees may still want to use some amount of SBP or term insurance to benefit a surviving spouse (or a kid’s college fund) until you have the financial independence to self-insure for those as well. In general, if the annual cost of insurance is close to a family’s budget for a month of entertainment expenses, then in my opinion it’s probably worth keeping the insurance. However this appears to be a judgment call.

      Thanks again for another outstanding and thought-provoking question. You and I may both have parts of the “right” answer and this could be a perpetual debate (like whether to pay off a mortgage). I’m going to run it by a couple of CFPs and turn it into a separate blog post.

  7. Reply
    vanguard23 June 30, 2014 at 10:11 PM

    I used the USAA Life Insurance Calculator prior to setting out in search of a replacement for my SGLI after my retirement…and it indicated I didn’t need one based on our combined assets and income streams after military retirement. My wife would also receive a military pension upon her retirement from active duty and I took the full SBP, so she would be taken care of. I went ahead and got a 20-year level term through AAFMAA anyway (and as you stated, better rates than USAA or VGLI) just to cover the outstanding mortgage on the house which we anticipate would be paid off in the next 13 years. I did some calculations, and even though we can pay the mortgage in full now, the APR on the loan is quite low at 2.5%, and the cumulative premiums to be paid over the 20 years would be just a fraction of the coverage so it made sense to me to secure the term life insurance vice self insuring. I had to get a medical exam but I thought it was well worth it.

    • Reply
      Doug Nordman July 2, 2014 at 8:36 PM

      Thanks, Mel, that’s a very useful analysis! You’ve neatly insured against your mortgage liability, and your longevity is already covered by your pensions.

      That’s a great mortgage interest rate. I’d hold on to that debt, too– and these days you can practically beat its interest rate with CDs.

      I think the biggest advantage of the SGLI–>VGLI conversion is being able to skip the medical exam and the underwriting, especially for veterans with possible medical issues or high-risk hobbies.

  8. Reply
    GubMints June 26, 2014 at 12:50 PM

    As an alternate/comparison to USAA, I’ve been very happy w/ Navy Mutual Aid Assn for Term Life.

    They beat USAA and VGLI/FEGLI quotes, plus they are AAA-rated.

    • Reply
      Doug Nordman June 26, 2014 at 8:20 PM

      Thanks, Eddie!

      I think many of the military mutual-aid associations will have lower rates than USAA, VGLI, and FEGLI. The key is verifying whether or not a medical exam and underwriting will be required, and VLGI helps avoid concerns about pre-existing conditions or anomalies on earlier physicals.

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