Examine all your life insurance options before you leave the military
February 13, 2005
Correction (Feb. 19, 2005): This article contained incorrect information about Dependency and Indemnity Compensation. DIC is administered by the Department of Veterans Affairs and is paid to eligible dependents of veterans who died in service or whose death resulted from a service-connected condition. The amount of the DIC benefit is not calculated based on a veteran’s salary or rank. Visit www.va.gov for more information.
As most servicemembers know, separating from the military is more complicated than trading in camos for khakis. Transitioning to the civilian world can be a challenge, but it also can be an opportunity to revisit your plan to build financial security for the future. If separation is in your sights, don’t overlook the need to replace one of the most important benefits you receive in the military — life insurance.
While on active duty, you are covered by Servicemembers’ Group Life Insurance (SGLI), which provides $250,000 of life insurance coverage for you and the option to purchase $100,000 coverage on your spouse. Since SGLI coverage does not extend beyond your military service, it’s important to start shopping for a replacement life insurance policy at least three months before your separation date to ensure your loved ones remain protected.
One option is to convert your SGLI policy to five-year renewable term coverage with Veteran’s Group Life Insurance (VGLI), which will provide coverage up to $250,000.
While some people, particularly those in poor health, may find VGLI coverage to be a good value, those who are healthy may find that VGLI costs are high when compared with a commercial life insurance policy.
If you choose to explore life insurance options with other insurers, the first step is to determine how much coverage is right for you. Consider the following key areas:
Coverage for you
A general rule of thumb is that adequate life insurance protection should cover seven to 10 times your annual income, though more thorough calculations are recommended before purchasing a policy. Speaking with an insurance professional or financial advisor will help you estimate what immediate and ongoing expenses your family would have to cover if your income were lost.
A professional also can guide you in deciding whether a “term” or “permanent” life insurance policy best suits your goals. If you are a single adult with no dependents and no debt, you may discover that your best option is to forgo life insurance altogether.
Coverage for spouses
Even if your spouse doesn’t earn an income, he or she is an important part of your family’s financial security. The monetary cost of replacing household contributions such as child care, meal preparation and household tasks would be significant, and could be offset by even a minimal life insurance policy.
Coverage for children
The military began offering free coverage for servicemembers’ children under SGLI in 2001. To replace this coverage, you may want to consider adding a “child rider” to your new policy. A child rider provides coverage for your children while they are dependent on you, and guarantees they will have the option of purchasing their own policies when they reach age 25, regardless of their health at that time.
In addition to SGLI, servicemembers also receive Dependency and Indemnity Compensation (DIC) coverage through the military. DIC is designed to assist surviving spouses and dependent children of veterans whose deaths result from service-connected events while on active duty.
Depending on your salary and number of dependents, DIC can provide a significant monthly income over and above the lump sum from SGLI. Since DIC benefits are not available to you upon leaving the military (unless payments had already started prior to separation), you’ll want to factor this potential income into your new life insurance policy.
Next, be sure to comparison shop your policy to help ensure you obtain the best product and price. Establishing life insurance coverage can be the beginning of a long-term relationship with the insurance company you choose, which means that selecting the right insurer is as important as purchasing the right type and level of coverage. Look for a company with excellent financial strength (measured by ratings agencies such as A.M. Best Company) and a track record of fair claims handling.
If you decide to purchase a new policy, apply before your separation date because it can take up to two months to underwrite a life insurance policy. And be sure not to cancel SGLI until the new policy has been issued and the first premium has been paid. Life insurance medical exams can sometimes uncover an unknown medical condition that could affect your insurability with a new provider.
Taking the time now to weigh your life insurance options carefully can help ensure financial peace of mind as you begin your civilian life.
Mitch Swanda is a salaried certified financial planner practitioner with USAA Financial Planning Services, one of the USAA family of companies. USAA is a diversified insurance and financial services organization that has served the military community since 1922. Swanda also served six years on active duty in the U.S. Navy.
Two types of coverage
Term insurance: Term insurance is similar to what you currently have through SGLI, although SGLI is only in force while you are on active duty. The policy amount is paid to your beneficiaries upon your death. This is known as a “death benefit.” Coverage is for a contracted period or term; usually a specified number of years, or up to a specified age. Generally, term insurance gives you the largest immediate death benefit for the lowest premium dollar.
Permanent insurance: Within the framework of permanent insurance are Whole Life, Universal Life and Variable Universal Life. These types of policies are known as “cash value” insurance, where a portion of your premium goes into a cash fund that may grow every year on a tax-deferred basis. Upon your death, your beneficiaries receive the death benefit, which may be larger than the original policy amount. Premiums for permanent insurance are normally higher than those for term insurance.