Before any military member goes on a mission, he or she gets an operations order spelling out the succession of command, plus instructions and resources in case the mission goes bad.
Essentially, this is what life insurance does for your family. Life insurance provides emergency money to see your family through in case the plan sponsor – the person drawing that regular military paycheck – should pass away. What are your financial resources and options when a family member dies, and how can you best protect yourself and your family? If something happens to you, are your spouse, children, or parents going to be okay? Where will the money come from to carry them through?
Death gratuity is the first line of defense for military families who lose a service member. This is effectively free insurance, entirely paid for by the government. If a service member dies in the line of duty, the federal government pays a death gratuity: a single lump sum of $100,000 to the designated beneficiary or beneficiaries or next of kin. There are no premiums due for this, and you don’t have to sign up for anything. You get this just for being in the military. But you need to designate a beneficiary, or group of beneficiaries. If you don’t, the military will give out the gratuity, prioritized as follows:
- To the surviving spouse of the person
- To any surviving children of the person and the descendants of any deceased children by representation
- To the surviving parents or their surviving heirs, if the parents are deceased
- To the duly appointed executor or administrator of the estate of the person
- Other next of kin entitled under the laws of domicile of the person at the time of the person’s death
Despite this, it’s important to designate a beneficiary of your own. The official order of priority listed above may not match up with your wishes or the real need for funds. For example, if you have a child living with you who is not formally adopted and you are not married, you could wind up accidentally disinheriting the child. And if the money goes to your estate, it goes through probate, which means the government and all your creditors get a bite of the apple before your next of kin does.
By designating a next of kin as beneficiary ahead of your estate, you allow your assets to bypass probate. This potentially dramatically increases the amount of money that will go to your family, rather than to creditors.
Incidentally, this is also why you should identify beneficiaries by name on all your life insurance, annuities, and retirement accounts – to protect them from being routed through probate and devoured by lawyers’ fees and creditors.
Servicemen’s Group Life Insurance (SGLI)
The second line of defense is Servicemen’s Group Life Insurance, or SGLI. Nearly all military families are familiar with this. In a nutshell, you can buy up to $400,000 of term life insurance for the service member at bargain basement prices. The government subsidizes the premiums, so the term premiums tend to be much cheaper than an equivalent amount of no-underwriting insurance – that is, insurance bought guaranteed issue, or without a health exam, in the private insurance market.
What does “term insurance” mean? Simply this: The life insurance is in effect for a specific period of time, i.e., the term. In this case, the term is normally from your inprocessing date to your date of discharge (unless you die first or cancel coverage).
The thing to remember about SGLI is that the older you get, the more of a deal it is. If you’re 40 years old, SGLI provides a maximum death benefit of $400,000 at a premium of $23 per month – the same premium that a 20-year-old pays for SGLI. To get a comparable amount of life insurance in the private market, a 40-year-old might have to pay nearly twice that amount – and even then may not qualify. Plus, if you have medical issues, such as high blood pressure, or if you develop a disease such as cancer at any time, you may well be declined for coverage with a commercial carrier. For SGLI, issue of a policy is guaranteed, regardless of your medical history.
Traumatic Injury Insurance Rider
As an added benefit, SGLI also comes with an additional rider: traumatic injury coverage. The premium is $1 per month for active duty members and reserve component members with full-time coverage, and $1 per year for reserve component members with part-time coverage. If you should become disabled, it pays a variable benefit, depending on the specific injury. Traumatic Injury Coverage provides benefits as high as $100,000 for loss of limb or eyesight.
You should consider getting some coverage on family members – especially a spouse, even if that spouse is not working outside the home. The reason is because you will likely have to hire someone to do everything your spouse does for you and your children if he or she dies – and that is going to cost money. In some cases, service members with small children have to leave the military because of the death of a spouse, obtaining a hardship discharge, because of the lack of an alternative caregiver.
SGLI provides affordable coverage of up to $100,000 for spouses and up to $10,000 per child. Family SGLI provides the full $100,000 coverage with a premium of just $5 per month for spouses under age 35, and $6.50 per month for spouses between the ages of 35 and 39. The maximum premium under this plan is $50 per month for spouses over age 60.
You do not need to buy additional coverage to insure children. Children who are members of your household and enrolled in DEERS (Defense Enrollment Eligibility Reporting System) automatically receive $10,000 in coverage per child, provided the service member is enrolled in SGLI.
Correcting a Myth
Occasionally, you may hear scuttlebutt that SGLI will not pay a death benefit if you do something stupid, like drive under the influence or fail to wear a seatbelt. That is not the case. SGLI pays a death benefit under all those circumstances. The circumstances under which the SGLI program will not pay a claim are very limited, and include suicide within two years of issue, death while committing a felony, or if you lie about your health on the application and die within the first two years (the so-called “contestability period” in life insurance) of the policy.
Is SGLI Enough?
You might think that the maximum SGLI face amount of $400,000 combined with another $100,000 in death gratuity is a lot of money. It’s not. Indeed, many widows and widowers find it goes surprisingly quickly – especially if a grieving spouse takes time off from work to spend with the children. If you’re active duty, the military normally funds a final move to your home of record, if you or your survivor so choose – so that can help a bit.
However, that pot of money has to replace an entire paycheck. What’s more, it has to support almost an entire set of benefits, including the retirement pension you didn’t get to earn, years of base pay, and base pay increases you didn’t get to earn, as well as years of housing allowances. If you live in expensive areas like Hawaii, San Francisco, or San Diego, that housing allowance adds up to quite a bit.
Determining a Coverage Amount
A good rule of thumb for service members who have families to support is to own a multiple of 10 to 20 times your income, including your Basic Allowance for Housing, allowances such as sea pay, flight pay, jump pay, foreign language proficiency pay and other special pays, plus the annual cost of health insurance, if you want your family out of the military TRICARE system. TRICARE is the military health insurance system and some members feel the quality of care and coverage is not as high as some commercial insurance options. If you’re young, lean toward 20 times. If you are nearing retirement, your income doesn’t have to replace as many years, and, hopefully, you have some savings piled up to soften the blow.
If $400,000 doesn’t meet your needs, you may want to buy additional coverage from an outside carrier. USAA commonly markets itself as a service provider to the military, as does the Navy Federal Credit Union. But there are alternatives as well.
You should keep in mind that it is important to select a life insurance policy that does not include an “act of war” exclusion. Some policies do not pay out if you die as a result of an act of war. This means you may not want to get the lowest-cost policy on the market. When it comes to life insurance, a policy that actually protects your family, financially, against the things most likely to kill you is much more important than saving a dollar or two per month by buying a policy that doesn’t cover you if you die in combat, or die of wounds received in combat. Always look at the policy’s fine print to see what is specifically excluded.
SGLI Isn’t Permanent Coverage
If you want a permanent insurance policy, as opposed to a term insurance policy like SGLI, you will have to go to an outside insurance company and ask the agent to show you a whole life insurance, universal life insurance, or variable life insurance policy. These policies have higher premiums, at least in the short run, but they have a key long-term advantage: They are designed to pay out a death benefit no matter how old you are when you die.
So while you get nothing back from a term policy if you don’t die during the term (except for a few “return of premium” policies that have higher premiums), money in a permanent insurance policy will come back to your family, eventually, provided you keep the policy in force. They also build up cash value, which can be a useful form of tax-advantaged savings.
However, permanent coverage doesn’t make sense for everyone. It works best for families that are able to put extra money aside on a regular basis. It’s best to speak with your insurance agent, and at least one other knowledgeable professional about whether you need permanent coverage, and whether it makes sense in your case.
Transitioning Out of Service
SGLI is a very good life insurance deal for those who are still serving. Once you leave the military, however, your benefits cease. Uncle Sam knows you don’t turn in your need for life insurance protection along with your gear at the end of your hitch. You and your family still need the life insurance protection.
This is where Veterans Group Life Insurance comes in. It’s pretty much the same as SGLI, minus the traumatic injury coverage, and because you lose the government subsidy of premiums, your monthly prices increase.
What you’re ultimately left with is a standard but expensive five-year term policy. Issue is guaranteed, unless you decline it when you leave the service. You can extend the coverage, but the premium goes up every five years. Eventually, premiums get so onerous that almost everyone drops the policy before they die.
Furthermore, VGLI premiums are high because everyone with health problems leaving the military signs up. Healthier veterans have other options, and therefore get different insurance. This process of adverse selection leaves VGLI with a bad risk pool, which drives up premiums for those still in – further prompting healthy veterans to leave and buy other coverage. Therefore, a vicious circle ensues.
If you have health problems that would cause you to get “rated up” by insurance companies (assigned to a more expensive risk pool), then VGLI might be the way to go. But if you are in reasonably good health, shop around for alternatives.
Converting to Permanent Coverage
One of the common downsides to very inexpensive term life insurance is the lack of options for converting to permanent life insurance. Plus, SGLI doesn’t offer a permanent life insurance policy. However, SGLI enrollees have a trapdoor to permanent insurance: Service members transitioning out of military service and their spouses have a little-known option to convert their SGLI coverage to a whole life policy at standard rates, regardless of medical condition.
A whole life policy is a form of permanent insurance – it never expires. As long as you keep paying premiums as agreed, it will stay in force forever, and also build up cash value over time. (Actuarially, whole life policies are designed so that their cash value equals the death benefit at age 121, and they just send you a check and cancel the policy when you turn 121 if your policy is still in force.)
You have 120 days after leaving the service to exercise this option. However, if you have severe health problems that are likely to result in your death in a limited number of years, you may be better off staying with VGLI, rather than converting to a permanent policy. This can be a tough bet, however, because medical technology improves every year. Many people live on many years, even with severe health issues.
If you live very long, you’re better off with a permanent policy. If you die in the first 5 to 15 years, you’re better off sticking with VGLI, even if you have to renew once or twice. The longer you remain alive, the more sense it makes to have a permanent policy. It’s a judgement call, and highly dependent on your individual situation at the time you leave the service.
Additionally, if you are in excellent health, you may be better off buying any whole life or other permanent life insurance you need in the open market – if you can qualify for preferred or select preferred rates, or their equivalent rates with that carrier, which are less expensive than standard rates.
SGLI is a terrific program, but it is not the only solution needed by most military families. You need to consider the total amount of coverage, coverage for the entire family, price, and the likelihood that your insurance will actually be in force when the insured dies. Cheap term may expire before that time comes – and you will have wasted all those years’ worth of premiums. Make it too expensive, though, and you’ll be tempted to lapse the policy.
The best policy isn’t the permanent, and it’s not the term. It’s not the cheap and it’s not the expensive – at least in the long run. The best policies to own are the ones that are the most likely to be in force when the insured dies.
Have you, a friend, or a loved one ever experienced a death in the family? How did the life insurance in place – or the lack thereof – affect the surviving family members?