What are your financial resources and options when a family member dies? If something happens to you, are your spouse, children, or parents going to be OK? Where will the money come from to carry them through?
These are the questions that life insurance answers. Life insurance provides emergency money to see your family through in case you pass away. And if you or a loved one are in the military, you have options civilians don’t.
Death gratuity is the first line of defense for military families who lose a service member. It’s effectively free insurance 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.
You don’t need to pay any premiums for the death gratuity, and you don’t have to sign up for anything. You get it just for being in the military. But you do need to designate a beneficiary or group of beneficiaries. If you don’t, the military will give out the gratuity, prioritized as follows:
- To your surviving spouse
- To your surviving children and the descendants of any deceased children by representation
- To your surviving parents (or their surviving heirs if your parents are deceased)
- To the duly appointed executor or administrator of your estate
- Other next of kin entitled under the laws of domicile of your jurisdiction of residence at the time of your death
It’s important to designate a beneficiary of your own, because this official order of priority 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 share of it 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 can dramatically increase the amount of money that will go to your family rather than to creditors.
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. In a nutshell, you can buy up to $400,000 of term life insurance per eligible 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 in the private insurance market that doesn’t require a health exam.
Term life insurance means the policy is in effect for a specific period of time (the term). For SGLI, the term is typically from your inprocessing date to your date of discharge, unless you die first or cancel coverage. The other major type of life insurance is permanent life insurance, which remains effective indefinitely.
The older you get, the more important SGLI is. If you’re 40 years old, SGLI provides a maximum death benefit of $400,000 at a premium of $24 per month – the same premium 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, they may not qualify.
Plus, if you have medical issues, such as high blood pressure, or you develop a disease such as cancer at any time, you may be declined for coverage with a commercial carrier. For SGLI, you’re guaranteed a policy, regardless of your medical history.
Traumatic Injury Insurance Rider
As an added benefit, SGLI also comes with an additional rider: Traumatic Injury Protection (TSGLI). 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 become disabled, it pays a variable benefit, depending on the specific injury. TSGLI coverage provides benefits as high as $100,000 for loss of limb or eyesight.
Also consider getting some coverage for your family members – especially your spouse, even if they aren’t working outside the home. You will likely have to hire someone to do everything your spouse does for you and your children if they die. In some cases, service members with small children have to leave the military due to the death of a spouse, obtaining a hardship discharge because they lack an alternative caregiver.
SGLI provides affordable coverage of up to $100,000 for spouses (or the amount of the service member’s coverage, whichever is less) and up to $10,000 per child. Family SGLI provides the full $100,000 coverage with a premium of just $4.50 per month for spouses under age 35 and $5.30 per month for spouses between the ages of 35 and 39. Premiums rise with age, reaching a maximum of $45 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 you are enrolled in SGLI.
Correcting a Myth
Occasionally, you may hear rumors that SGLI won’t 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 most 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 of the policy, known as the “contestability period.”
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 children. If you’re active-duty, the military normally funds a final move to your home of record (where you lived before your active-duty status) if you or your survivor so choose, so that can help a bit.
However, your payout 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, as well as years of housing allowances. If you live in an expensive area like San Francisco or New York City, 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 and allowances such as sea pay, flight pay, jump pay, foreign language proficiency pay, and other special pays.
If you want your family out of the military TRICARE system, you’ll also need to consider the cost of health insurance. Some TRICARE members feel the system’s quality of care and coverage is not as high as some commercial insurance options. They prefer commercial health insurance and are willing to pay more for it.
With regards to your total life insurance needs as a service member, the general rule of thumb is: If you’re young, lean toward 20 times your income. If you’re nearing retirement, 10 times your income should be adequate. That’s because 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 using these rules of thumb, 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. Companies like Ladder offer affordable life insurance policies that can supplement your military benefits.
It’s important to select a life insurance policy that does not include an “act of war” exclusion. Some policies don’t pay out if you die as a result of an act of war, so 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 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’ll 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, all of which are variants of permanent life insurance.
Permanent life policies have higher premiums, at least in the short run, but they have a key long-term advantage: They’re 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. Permanent life policies 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 can 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 great life insurance deal for those who are still serving. Once you leave the military, however, your benefits cease. This is where Veterans Group Life Insurance (VGLI) comes in. Coverage-wise, it’s pretty much the same as SGLI, minus the traumatic injury coverage. However, because you lose the government subsidy of premiums, its monthly premiums are higher.
For example, monthly VGLI premiums come in at $10 per $100,000 in coverage for veterans aged 30 to 34, much higher than SGLI spousal coverage for someone in the same age range. Veterans ages 60 to 64 pay $108 per $100,000 in coverage under VGLI.
Ultimately, VGLI 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 all policyholders – further prompting healthy veterans to leave and buy other coverage.
If you have health problems that would cause you to be “rated up” (assigned to a more expensive risk pool), by insurance companies, then VGLI might be the way to go. But if you’re in reasonably good health, shop around for alternatives.
Converting to Permanent Coverage
One of the common downsides to 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. See the VA website for more information about converting SGLI to permanent coverage.
A whole life policy is a form of permanent insurance, meaning 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.
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 decision, however, because medical technology improves every year. Many people live for 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 five 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’re 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’s not the only solution most military families need. You must consider the total amount of coverage, coverage for the entire family, price, and the likelihood the insurance will actually be in force when the insured dies. Cheap term coverage may expire before that time comes, which means you’ll have wasted all those years’ worth of premiums. Make it too expensive, though, and you’ll be tempted to let the policy lapse.
There is no single “best policy” for everyone. The best policies are the ones that are most likely to be in force when the insured dies. You and your medical provider are the best people to judge what that means for you.
Are you an active-duty service member? What are your biggest concerns when it comes to life insurance?