Military veteran & CFP Jeff Rose has started another movement over at Good Financial Cents! The Roth IRA movement raised a huge awareness in the financial independence corner of the blogosphere. Now he’s trying to do the same for life insurance.
Today, 22 August, hundreds of personal-finance bloggers are posting their takes on the topic. However, only a handful of us blog about military topics, so I’ll start with the basics of deciding about military life insurance.
The first insurance question for servicemembers should always be: Do you need life insurance? Who are you trying to help? If you’re single with no kids, and if you’re not supporting others (like your parents or a business partner) then you probably don’t need life insurance. Save the premiums for your own financial independence and don’t worry about the rest of this post.
Military insurance may be cheap, but don’t insure yourself and make your parents the beneficiaries just because it’s cheap. Unless you’re already sending part of your paycheck to your parents, they’d prefer that you save the premiums for your own emergency fund or retirement investments. In the awful event that you die during your military service, your funeral expenses are already covered by the military and nobody else is liable for your personal debts.
When you have family members then it makes sense to buy Servicemembers Group Life Insurance. I’m not going to take you through each and every feature of SGLI, but you can learn more at Military.com’s Life Insurance 101 article series. SGLI offers you cheap term insurance as long as you’re on active duty, and if you leave active duty while you have SGLI coverage then you have plenty of time to convert that coverage to the VA’s Veterans Group Life Insurance. For those reasons alone, if someone needs your insurance benefits then these two term policies are probably the best combination of “affordable” and “good customer service”.
In general, term insurance offers the best combination of price and flexibility. Universal life and whole life policies attempt to combine insurance with investments and cash value, but they tend to have much less flexibility for higher overall costs. (My father had a particularly miserable experience with whole life policies from the 1960s to 2010, but hopefully today’s products are better.) I’m going to stick to term insurance for the rest of this post. If you’re being sold on the advantages of whole life or universal life, it’s a sign that you need to seek further advice on financial forums (like Early-Retirement.org or Bogleheads.org). Find a fee-only financial advisor to help you sort through the marketing and sales tactics.
Once you’ve decided that you need life insurance, then the next question is: How much?
It’s never an easy question: “Hey, honey, how much money do you need if I’m gone?”
Unfortunately even after you deal with the emotional aspects of that question, you still have a few hours of financial research ahead of you. Does your family need an income stream for the rest of their lives, or a lump sum for a few years of living expenses? Do you want to pay off the mortgage and all other debts? Do you want to pay for the kid’s college expenses or hope that they’ll figure it out with scholarships, work/study programs, and loans? Do you have special-needs kids who will have extra educational expenses or require lifetime financial support?
Once you’ve decided on a tentative plan, work through the VA’s insurance calculator to see what other benefits are available. For example, Social Security may pay survivor benefits to your spouse and kids. The VA could pay Dependent’s Indemnity Compensation and even help with Survivor’s and Dependent’s Educational Assistance.
Although SGLI and VGLI are “easy” decisions, when you separate from active duty you may find that other term insurance is cheaper. If you’re younger and in good health then shop around for term insurance at USAA, Armed Forces Benefits Association, Navy Mutual Aid, and Armed Services Mutual Benefit Association. Check the company’s financial ratings and research their complaint records. “Cheap” does not mean the same as “customer service”, and combining other insurance policies with one company (like USAA) may entitle you to discounts.
Spouses need insuring too, not just servicemembers. Stay-at-home spouses contribute to the family finances, and if they died then you’d lose their support. You want to protect both sources of income, and if your spouse is raising the kids then you’re going to need childcare funds. If your spouse dies while you’re on active duty then you may also want to be able to pay off the mortgage and other debts while considering the kid’s college expenses. Life is hard enough when you lose a spouse, and you want to have breathing room to consider whether it makes sense to stay on active duty or find another career. Start your search with Family SGLI (FSGLI) and move up from there.
If you’re one of the 15% of servicemembers who’s eligible for a military retirement, whether it’s active duty or Reserve/Guard, then spend some serious time considering the Survivor Benefits Program. (Actually it’s not your choice– your spouse has to decline the insurance or else it defaults to full coverage.) In most cases, SBP pays up to 55% of your military pension to your surviving spouse– and additional funds for your children up to age 22. The important (and all too rare) feature of SBP is that its payments rise each year with the retiree cost of living adjustment. 55% of your pension may not be enough to pay all the expenses of your survivors, but it’s an affordable inflation-fighting stream of income that can’t be matched by any policies from any other companies. See the “Related articles” section at the end of this post to learn more about SBP.
I have one more piece of advice for life insurance, and it comes from the bitter experience of thousands of survivors: update your beneficiaries. When you get married, make sure you buy enough insurance and have the correct beneficiary information on the policy. If you’re divorced or remarried, update the policies immediately. When you add kids to your family, update the information on your policy. Make sure you have the right contingent beneficiaries if you and your spouse both die before the policy pays out.
I saw it happen during my active-duty days and I’ve heard the stories from dozens of shipmates. A servicemember gets divorced and doesn’t update their SGLI. They die in an accident (or from a stroke or a heart attack) and the ex-spouse gets the payout. Maybe the kids are in the custody of the servicemember, or maybe their parents are trying to raise the grandkids. In either case the money isn’t going to the right place for the right people.
Even worse, a servicemember remarries and doesn’t get around to updating their SGLI. They die suddenly and the surviving spouse has nothing while the ex-spouse wins the insurance lottery. Or the happy couple has more kids and doesn’t take out more SBP insurance on them. The retiree’s sudden death leaves only the surviving spouse with SBP instead of both the spouse and kids.
This post is nearly 2000 words already, and we’ve only covered the big picture. Life insurance is like exercising or eating your vegetables: you know you should, but you just don’t get around to it. The Life Insurance Movement is designed to grab your attention. Go review your coverage, talk with your family, and make the changes.
I’d love to hear from readers who take action from this post, and hopefully they inspire the rest of us!
Jeff Rose: It’s Time For Another Movement – Life Insurance Style
Jeff Rose: The Life Insurance Movement
Pricing life insurance and investments
Survivor Benefit Plan
More SBP details
The Reserve Component Survivor Benefit Plan
Civilian version of a Life Insurance Needs Calculator, with iPad & iPhone apps
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