In previous articles, I’ve written a summary of the life insurance and death benefits provided for military service members and also a guide on why people need life insurance and how to calculate the appropriate amount. As I’ve detailed, the death benefits, which are offered at an incredibly low cost, often provide more than enough coverage for a service member who is the primary earner in the household. To recap, the lump sum equivalent for a family with one service member, a spouse, and two children is in excess of $800,000, with a portion offered in the form of guaranteed annuity payments.
Of course, exceptions to the norm always exist, and several situations demand that a service member should consider purchasing additional life insurance through a private party. These situations or scenarios fall into three categories.
- A member of the family is underinsured.
- Concerns about future insurability issues or expenses.
- Impending transition out of the military.
It’s important for service members to understand and calculate their family’s insurance needs. While the $800,000 lump sum equivalent benefit discussed above is a lot of money, the benefit can’t be raised over time as income and obligations increase. In other words, a Lieutenant with a spouse and two children has the same benefit as a Colonel with a spouse and two children even though their incomes and financial obligations are entirely different. As one’s income increases during the span of a career, it’s important to understand how insurance needs might change and purchase additional insurance as appropriate.
In the articles that I cited earlier in this article, I also discussed that a spouse has a value from a life insurance perspective as well, regardless of the amount of income that the spouse earns. While SGLI provides coverage of $100,000, I’m confident that many of you would agree that a spouse’s value is much higher, even when distilled down to a purely monetary level. For example, if the spouse cares for children full time and that spouse dies, the service member would likely need to pay for daycare and other costly services. At the same time, in a dual-income family, a spouse dying could also change living standards drastically if not adequately insured.
Challenges with Insurability or Expenses
Often overlooked in insurance planning is the future ability to purchase life insurance. As time passes, especially in the military, there is a chance that a person could be injured or develop a medical condition or disease. It’s likely that negative health history, even minor issues, could increase the cost of insurance or possibly render a person uninsurable altogether. Additionally, insurance rates rise with age.
For that reason, along with the unique demands on service members, the VA offers Veterans Group Life Insurance (VGLI). Like standard group insurance, though, VGLI rates increase over time and isn’t a cost-effective long-term solution for a healthier individual.
Impending Transition out of the military.
The other primary time to purchase life insurance is when transitioning out of the military. If a service member plans to ETS in the next three years, it may be time to look at purchasing a life insurance policy that will replace SGLI and any other insurance needs. Three years is not a hard and fast decision point. But given how fast those three years can go by with deployments, NTC rotations, and the transition itself, purchasing insurance can fall by the wayside.
Now, a critic might suggest that a person is likely to find and start employment while on terminal leave and be enrolled in the new company’s group life insurance plan. Sure, that is indeed likely. Here’s the catch: if someone doesn’t start employment immediately, or the employer doesn’t offer group life insurance as a benefit, or the person wants to start a business, that person could find themselves without life insurance for a short or long amount of time. It’s best not to begin the underwriting process for a new life insurance policy, which can take time, while uninsured.
Also, again, group life insurance costs increase over time. A level-term insurance policy will often be less expensive than a group policy over a 20 or 30-year timespan.
Term Versus Permanent (Whole) Life Insurance
This topic likely deserves an entirely separate post. Overwhelmingly, the right choice for life insurance, especially as part of an organized, disciplined financial plan, is level-term life insurance over the appropriate time span. Term life insurance is pure, no-frills life insurance, which means that it is also the least expensive.
Whole life, or other forms of permanent insurance, are much more expensive and provide many more benefits. And when a person doesn’t need those benefits, that person ends up paying for a product whose whole is less than the sum of its parts.
For most service members most of the time, SGLI along with military death benefits will provide enough life insurance coverage for a service member and his or her family. As financial obligations or liabilities increase, though, the need for life insurance increases as well. Some scenarios result in service members needing life insurance above and beyond what is provided by the military and those people must consider purchasing additional life insurance to protect their family. Talk to a fiduciary to better understand how life insurance fits into your overall financial plan.
Are you interested in learning more about financial planning and investing? Please visit my website to learn about how I help our service members and veterans plan for and achieve financial independence. You can also contact me at Derek.Merkler@Parsonex.com.
My blog discusses a myriad of financial topics and challenges, book reviews, and commentary on current events in the financial world to benefit our military and veteran community. I attempt to be as thorough as possible when examining each subject but can never account for every possible scenario. Please remember to consult with your own advisers for advice on your particular situation. Thank you for reading!
Advisory Services offered through Parsonex Advisory Services, Inc. 8310 S. Valley Highway, Ste. 110, Englewood, CO 80112 (303) 662-8700.