By Barbara O’Neill, Ph.D., CFP®, AFC® [email protected]
One of the costliest financial risks that families face is the death of a breadwinner. This is especially true if a spouse and children depend upon that person for all of their support. Not surprisingly, given the risks inherent in military Service, life insurance is a frequent topic of conversation between personal financial managers (PFMs) and military families.
Discussions often begin with Servicemembers Group Life Insurance (SGLI), a low-cost term life insurance policy that provides $400,000 of coverage unless Service members elect no coverage or lower coverage starting at $50,000 in $50,000 increments ($100,000, $150,000, etc.). Up to $100,000 of FSGLI coverage can also be purchased by military spouses and $10,000 of free life insurance is available to dependent children under 18.
Common questions reported by PFMs include premium costs, the amount of coverage needed, and who to name as a beneficiary to receive policy face value if a Service member dies. SGLI policies can name multiple primary beneficiaries as well as contingent beneficiaries. The current monthly premium for $400,000 of coverage is $24 plus a mandatory $1 premium for TSGLI, which provides funding for Service members who have experienced traumatic injuries. Costs for SGLI are standardized regardless of age, health status, gender, and tobacco use.
There is no simple formula to determine the amount of life insurance that military families need. Some families may need more than the SGLI limit. Many factors must be considered, including:
- A family’s current assets and liabilities
- Earning power and job skills of a surviving spouse
- Other sources of income for a family (e.g., Social Security, inheritances)
- Existing life insurance coverage (e.g., SGLI group insurance for Service members)
- Projected expenses (e.g., funeral/medical bills and college) and debts (e.g., a mortgage).
While general guidelines exist to buy life insurance as a multiple (e.g., 7x) of earnings, the best way to determine a person’s life insurance need is with a personalized analysis. Many insurance companies have worksheets or online calculators to calculate life insurance needs. They total up a family’s current and future financial needs, subtract available resources, and determine the gap to fill with life insurance.
Typically, life insurance planning tools include a calculation of lump sum cash needs such as mortgage liquidation, debt repayment, and final expenses. There are also calculations for the income needs of children and a surviving spouse. After the total amount of money needed is calculated, existing insurance and assets are subtracted to determine the additional amount of insurance required.
Term Life Insurance
Once a dollar amount is calculated, the next step is to choose between the two basic types of life insurance: term insurance and permanent (cash value) insurance. Term insurance provides protection only for a specific period of time and has no cash value or investment value. The longer the term of the policy (e.g., 15 or 20 years vs. 5 years), the higher the initial premium will be. Each time a term life insurance policy is renewed, the premium increases to reflect an insured person’s older age.
Permanent Life Insurance
These policies combine protection for the entire life of an insured person along with a savings component (cash value). Annual premiums are fixed for the life of the policy and are based on assumptions about interest and mortality rates. These premiums may be payable for life, or for a limited number of years. Common forms of cash-value life insurance include whole life, variable life, and universal life. Their major difference is how premiums and earnings on the investment (cash value) component are determined.
For additional information about the benefits of life insurance and different policy types, review the Insurance Information Institute publication Life Insurance Basics.
U.S. Army photo by Mark R. W. Orders-Woempne