Life insurance is something that most military members know a little about, but many are vastly underinsured. SGLI (Servicemember’s Group Life Insurance) is $400,000 of term life insurance coverage that most military members have. This coverage is relatively cheap and comes out of your paycheck each month. Most members should probably have additional commercial term insurance from a company like USAA, but we will save that for another post. I want to focus on the decision to obtain a life insurance policy when you separate from or retire from the military. This brings up some complex decisions due to the principles of insurability. Many military members will be applying for disability benefits from the VA (Veterans Affairs). This process may unearth many medical problems that would drive up your term insurance rates, or at worst make you uninsurable. This coupled with the offering of Veteran’s Group Life Insurance (VGLI) makes the life insurance decision a complicated one for many transitioning families. Ultimately, you want to have just enough insurance to cover the financial loss of death, needing more insurance earlier in your life when your risk is greatest, and less as your life outstanding expenses decrease and your net worth increases.
First: Determine How Much Life Insurance you need
This is the first step in any insurance discussion. The amount of insurance you need throughout your life changes. Here are the steps to do this (for each spouse):
- Estimate the expenses that would need to be replaced and multiply it by 240 I.e. $5k/month*240 = $1,200,000)
- Add the mortgage balance or debt you would want to be paid off in the event of death
- Add the present value of education that you would want to pay for (I.e. You would need to put away $X for your 2 kids to go to college in 10 years)
- Subtract any investment amount that would be available to use upon death (I.e. TSP)
When you get to the end of this you will likely realize that you need 7 figures of life insurance in most instances. For military families with a mortgage and kids, $400,000 of SGLI is just simply not enough. Even if you don’t need life insurance right now, things could change in 3-5 years with a bigger mortgage and family that increases the degree of harm from a potential financial loss.
The Separation Decision: VGLI Premiums are Very Expensive and Commercial Term Usually Makes More Sense
When you separate from the military, you have options. Many members have an SGLI policy when they are Active. Here are the options when you leave:
- Stop your SGLI payments and don’t obtain additional insurance
- Convert SGLI to a whole-life product
- Get a VGLI policy
- Get a term insurance policy (can also get VGLI)
I will show why I believe that option 4 is the best for most transitioning military members.
Stopping SGLI payments makes sense if you have guaranteed pension income, and don’t see the need for insurance any time soon. This might be if you don’t plan to have kids or get married, so very few will be in this camp. If you have determined that you will need life insurance to replace financial loss, then going forward with no insurance is not an option.
Converting your SGLI policy to a whole-life policy is not a great option either. A whole life insurance product is going to be very expensive, likely 5-15 times the cost of term life insurance per dollar of coverage. A whole life policy is simply unsuitable for 99.9% of transitioning military members. It is best to keep insurance and investments separate, something that whole life insurance does very poorly.
Getting a VGLI policy is an option as you can get up to $400,000 of term life insurance coverage. You have 1 year and 120 days after separation to apply for VGLI. If you apply in the first 240 days, you don’t have to answer any health questions to qualify. For those who have severe disabilities that may make them uninsurable, VGLI may be the only option. However, for most, it should be the last option after you have attempted to obtain a commercial term insurance policy. Click here to find out more about VGLI details.
Getting a commercial term insurance policy should be the first option, and VGLI should be the backup. Term insurance is typically level, in the sense that you have the same premiums for the length of the policy (typically 20 years). VGLI rates increase every 5 years of age, so the premiums are very expensive. The below table shows how VGLI rates increase, and the graph shows the premiums for 20 years of VGLI coverage versus 20-year commercial term policies for a 30-year-old male at the three different health classes of super preferred, preferred, and standard. You can see that even at standard (the worst health class) the cost of a $500,000 policy is far less than that for 20 years of VGLI coverage. This is mainly because VGLI covers a pool of individuals with more health problems (disabled veterans) than commercial insurance policies.
VGLI Premium Schedule
Term Insurance is Cheaper the Earlier and Healthier You Get It
Commercial term insurance is relatively cheap in your 20s and 30s but may become more expensive or you may be uninsurable if you have these conditions:
- Anxiety and depression
- Heart disease
- High blood pressure
- High cholesterol
- Sleep apnea
Many military members may have these conditions or others and not know it, and it could be unearthed during the VA disability filing process. Also, many life insurance applications ask if you have ever filed for disability benefits, which is likely to only hurt your health class and your insurance rates if you have to answer yes. To quantify the financial benefits of getting insured when you are healthy (at least in the eyes of the insurance company), the below table shows the benefit of getting classified at a healthier level for a 20-year $1M policy for a 30-year-old male.
You can see that it is well worth it to get classified into a better health category. The “Breakeven” column shows the number of years of savings you would have by getting classified in the lower health class. For example, if I can get classified as super over preferred and I see myself not needing that insurance for another 3 years, I would want to decide to buy insurance as the breakeven is 5.36 years of savings from lower premiums. In other words, I don’t mind paying for 3 years of insurance that I don’t “need” yet due to having a lower mortgage and no kids, because I will save more than that in reduced premiums.
Our Financial Risk is greater earlier on in life
Earlier on in life, this is when you will have the greatest financial risk of death. The loss of an income-producing family member will hurt the most financially when you have more debt, younger kids, more life expenses outstanding, and a lower net worth. This is precisely when you need the insurance the most, and over time it will become less and less important to you as you pay off debt, live life, kids grow up, and wealth grows. The goal is ultimately to get to a place where you don’t need life insurance because you are financially independent, and the loss of yourself or your spouse would not financially ruin the family. It is for precisely this reason that this is such an important decision to obtain insurance when we are young and healthy when risk is the highest.
The decision around life insurance when leaving the military is not a simple one. This is due to acronyms (SGLI, VGLI, whole, term, etc.) and insurance agents that want to get paid. It is important to ignore the noise and properly estimate your insurance need and the best way to proceed. To summarize, before you go down the road of separation and filing for your VA disability benefits:
- Estimate insurance needs (and maybe your insurance needs in 3 years, we want to be generous with this estimate) If you don’t need life insurance and won’t for any foreseeable future because you are financially independent or have a large pension, stop here and go live your life.
- Apply for a level term life insurance with USAA or any other reputable insurance company as soon as you can but before filing for any VA disability claim
- If that gets denied, get $400,000 of VGLI coverage within 240 days of separating.
- If you end up getting 100% disability from the VA or at any point decide you don’t need your term insurance policy, just stop paying the premiums.
The goal is to cover the event of a financial loss when the impact is the greatest (early in life) and to do this at a reasonable cost. For the majority of transitioning members, the solution to this goal will be applying for a 20+ year, 7-figure term life insurance policy when you are at your most insurable point in life.