Life Insurance Decisions During Military Transition

Introduction

Life insurance decisions during military transition are some of the most critical decisions. Most military members do not carry enough insurance. The majority have SGLI (Servicemember’s Group Life Insurance) which is $500,000 of term life insurance coverage. This coverage is inexpensive at $31 per month and comes out of your paycheck each month. Most members should have more commercial term insurance from a company like USAA.

In this post, I want to focus on the decision to get 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) during transition. This process may unearth medical problems that will drive up your term insurance rates, or even make you uninsurable. The decision between Veteran’s Group Life Insurance (VGLI) and a commercial policy is complicated for transitioning members. The goal with insurance is to have enough insurance to cover the financial loss of death. You typically need more insurance earlier in your life when your risk is greatest. Later on in life, you can afford to carry less insurance as your life outstanding expenses decrease.

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 (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 analysis, you will likely realize that you may need 7 figures of life insurance. For military families with a mortgage and kids, $500,000 of SGLI is not enough. You also have to assess how life may change in the coming years with a bigger mortgage or family.

The Military Transition Life Insurance Decision: VGLI Premiums are Very Expensive; Commercial Term Can Make More Sense

When you separate from the military, you have options when it comes to insurance. Here are the main options when you leave:

Stop your SGLI payments and don’t get more insurance
Convert SGLI to a whole-life insurance product
Get a VGLI policy
Get a term insurance policy (can also get VGLI)

Stopping SGLI payments makes sense if you have guaranteed pension income, and don’t see the need for insurance. 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 with no insurance is not a realistic 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. It is best to keep insurance and investments separate, and costs low.

VGLI

Getting a VGLI policy is an option as you can get up to $500,000 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 make them uninsurable, VGLI could be the only option. This should be the last resort after you have attempted to get a commercial term insurance policy. Click here to find out more about VGLI details.

Commercial Term Insurance

Getting a commercial term insurance policy should be the first option, and VGLI should be the backup. Term insurance is usually level, meaning you have the same premiums for the length of the policy. VGLI rates increase every 5 years of age, so the premiums are very expensive. The below table shows how VGLI rates increase. The graph shows the premiums for 20 years of VGLI coverage versus 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 because VGLI covers a pool of individuals with more health problems (disabled veterans), than commercial insurance policies.

VGLI Premium Schedule (as of the date of this blog publication date)

VGLI vs. Commercial Term Premiums for 30 Yr Old Male

Term Insurance is Cheaper the Earlier and Healthier You Get It

Commercial term insurance is cheap in your 20s and 30s, but may become more expensive or unattainable if you have these conditions:

Anxiety and depression
Asthma
Diabetes
Heart disease
High blood pressure
High cholesterol
HIV
Obesity
Cancer
Sleep apnea
Smoking

Many military members may have these conditions or others and not know it. This fact could come to light during the VA disability exam process. Also, many life insurance applications ask if you have ever filed for disability benefits, which could hurt your health class and your insurance rates if you have to answer yes. 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.

Savings of Getting Insurance When In a Healthier Class

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.

Conclusion

The life insurance decisions during military transition are not simple. 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 accurately estimate your insurance need. To summarize, before you go down the road of separation and filing for your VA disability benefits, you should:

Estimate insurance needs (and 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 a reputable insurance company as soon as you can but before filing for any VA disability claim.
If you are unable to get a policy, go get $400,000 of VGLI coverage within 240 days of separating.
If you at any point decide you don’t need your term insurance policy for any reason, stop paying the premiums.

The goal of this thinking is to cover the event of a financial loss when the impact is the greatest (early in life) at a reasonable cost. For the majority of transitioning members, the solution to this goal will be applying for a 20-30 year, 7-figure term life insurance policy when you are at your most insurable point in life.

If you need help with insurance or any other financial matter during your transition, reach out to an MFAA advisor that specializes in working with military and veteran families!