The prime directive to keep in mind when doing your life insurance planning is this: Have enough to replace your income for the people you love.
Now, that said, let’s take a look at what the maximum SGLI benefit of $400,000 can accomplish.
First, how long are you planning on being dead?
Usually, that’s quite a long time.The purpose of life insurance for breadwinners (including service members) is to replace the income they would have earned for the family. So add up all your pays and allowances – including special pays and BAH type II – which your spouse will lose shortly if you die. Add in the cost of medical insurance for your spouse and child, and the loss of TRICARE coverage, if your spouse doesn’t want to stay on the government health care plan.
If you do the math, you may find that that $400,000 SGLI death benefit will be spent by the time your baby is in high school. This is especially true in today’s low interest rate environment.
You are an E-6, married, with two children, with a base pay of $2,885. With special pays, you bring in an additional $5,000 per year. Your BAH Type II amounts to an additional $9,000 per year.
If you never got another promotion, and you never got another congressional pay raise, that $400,000 would vanish in about six years, at your family’s current rate of expenditure.
Of course, your spouse will also get a death gratuity worth $100,000. So that may buy her another couple of years’ breathing space. But once that money is gone, she has nothing for your childrens’ education left over, except what she has been able to contribute, while working and raising two young ones.
Rule of Thumb
At a minimum, you will probably want to have at least 10 times your take home income in life insurance. More than that if you have children. In today’s low interest rate environment, it is very difficult for your survivors to invest the money at a decent rate of return, without taking a lot of risk. If you want to leave an education fund for your children, in addition to providing a continuing income for them after you’re gone, then you may want to get about 20 times your income, especially if you are young – in your 20s or early 30s.
Is SGLI enough?
Serviceman’s Group Life Insurance is the best deal going for military members. It is solid coverage and very affordable – especially if you are over 30. But if you have a spouse and children, the max $400,000 coverage may not be enough.
The good news is that it is generally very easy to buy more coverage – especially for military service members who tend to be in above average health. Companies like USAA, New York Life, Northwestern Mutual, Mutual of Omaha, MetLife, Guardian and hundreds of other reputable life insurance providers will be happy to provide additional coverage for you, over and above your SGLI protection.
Note: Before you buy a life insurance policy, ensure that it does not exclude deaths due to an act of war, or for flying in noncommercial aviation. If you deploy, or are killed in an aviation accident, the insurer could potentially use the exclusion to deny the payment of a claim. This is a less important factor for dependency coverage.
For most service members, the primary beneficiary is an easy decision: A spouse, parent of a child/children, or your parents. But remember, it is quite possible that you and your spouse could die in the same accident. If this should occur, then your children have a problem. Children under age 18 cannot collect a death benefit directly. Instead, the courts will have to appoint a guardian for them. Hopefully this will be a close relative who knows and loves your children. But this may not be the person you want to handle their money for them!
Fortunately, the law makes it very easy for you to establish a trust right there on your life insurance forms – and name a trustee. The mechanism is called the UGMA (uniform gift to minors act) or UTMA (uniform transfer to minors act).
Here’s how it works:
You name a trustee in your life insurance documentation. Someone whose integrity you trust. That person handles the money on your children’s behalf. When your children reach the age of majority, they then can take control of the money. That means they get everything left when they turn 18. Meanwhile, your named trustee disburses the funds in the child’s best interest.
The trustee need not be the same individual as the guardian. That wonderful spendthrift aunt may love your children to death, but perhaps she cannot be trustedShould I Drop SGLI?
If you are very young, very healthy and you are looking at buying a large policy, say, for $1 million or more, you may find that buying one large annually renewable term policy is cheaper each month than keeping two separate policies.
I still suggest keeping SGLI in place – especially if you plan on staying in the military. Why? Because that cheap term insurance you get in the private market is going to get more expensive each year. The SGLI stays the same as long as you’re in the military.
Furthermore, SGLI also provides a traumatic injury benefit, called TSGLI. This is especially important for those in hazardous jobs (nearly everyone in the military) and if you ride a motorcycle. TSGLI provides cash compensation of up to $100,000 for a number of injuries to limb, eyesight, hearing, or genitourinary function. All of us who have been in the military for a while know people who have suffered a severe injury, whether from enemy action or accident. Your private life insurance coverage will not have this benefit.
The other thing SGLI gives you is the guaranteed right to continue coverage under VGLI, regardless of your medical condition. If you are in good health, when you leave the military, you may want to shop around – you can get better and cheaper insurance in the private market than via VGLI. But if you have a medical condition, you smoke, or there are any other factors that make it more expensive for you to buy your own life insurance coverage, you may want to keep the VGLI in place, at least until the children are grown.