How much Insurance is Enough? …Even When You Already Have SGLI

Guest Post by Kit Lancaster, CFP, AWMA

Imagine if something happened to you or your spouse while training, on a deployment or driving across town to get the groceries. What would those that depend on your income to your household to make ends meet? How would they pay the rent or mortgage? Health insurance, car payments, fund college savings accounts and save for retirement? What if you are a stay at home parent? Would you household run without you? School drop-offs, cooking, keeping a budget, childcare. How would their lives change? The purpose of life insurance is to provide funds and replace income for those who depend on your income or provide funds to replace the responsibilities of a stay at home parent.

Servicemembers starting their career in the military get early exposure and access to life insurance via Service Members Group Life Insurance. (SGLI). If your servicemember spouse (or yourself)  is in the military, they have $400,000 in SGLI coverage. To find out more about SGLI try a trusted source like MilitaryOneSource or the Veterans Affairs Benefits Portal.

A few great things about SGLI

•  It is affordable to buy up
• No underwriting, guaranteed issue
• When you leave the military, you will have the option to convert / take some SGLI with you without going into underwriting.

If you are a single solider with no beneficiaries, kids, dependents or family members depending on your income SGLI is nice to have, but not really needed. If you do not have a spouse or kids, you might have others in your life who depend now or will depend on you in the future. This could be your parents, siblings, or relatives who are unable to fully take care of themselves financially or are counting on you to take care of them as they age. Your life insurance or that of a loved one can also take care of end of life expenses like funerals, burials, and even helping family members fly to services which can be quite costly.

Once you have a family, kids, or others in your life who depend on your income, you need to look into life insurance. Look at your options and consider working with a professional to find the policy that is a right fit for you. If you are a “do it yourselfer” you might ask why you would want to work with a professional? Maybe you have already been haggled by a life insurance sales person who clearly is just trying to make a sale. If that is the case, keep looking or find a financial planner experienced with life insurance who can help you figure out what you need.

Too Many Life Insurance Options – Google Cannot Help You

There are 6 primary types of life insurance (annual renewable term, level term, whole life, universal life, index life, variable life). Within those six primary types there are a number of riders and optional benefits available. The combinations are almost literally endless. You can configure them hundreds or thousands of different ways. That is one of the areas where the professional comes in to save you time and create value.

What Does Underwriting Involve?

When going to purchase a life insurance policy your application will almost always go into underwriting of some sort. The insurance company wants to make sure they are charging you in relation to the risk they are taking on your life. Full underwriting includes the visit to your house by a registered nurse to take your height, weight, blood and urine samples. They will also ask you a set of health questions. If you are over 50 or have a special health condition, other tests may be required. (EKG, etc.) The insurance company will also pull your medical records for review.

Underwriting varies from carrier to carrier. This is another area an agent can create value for you, especially if you have an ongoing illness or health condition (high blood pressure, diabetes, high BMI, sleep issues etc.). SGLI and life insurance provided via an employer is typically group coverage that is guaranteed issue, typically a great benefit. It doesn’t cost your employer much and you get a big benefit.

Outside of SGLI or your employer provided insurance, guaranteed issue insurance products are available. If you are considering a carrier that does no underwriting, you are most likely signing up for a guaranteed issue life insurance product. For people that have poor health this could be your only option and create value for your situation. If you are in good health, you have almost a 100% chance of getting a better deal even if the underwriting process is express underwriting.

Why Get a Professional Opinion?

In my professional opinion a good financial planner who provides life insurance or knows a good insurance agent should be able to secure quotes from 8 to 15 companies. Bringing the top two to three companies for comparison. You might think one company has a lock on life insurance and that isn’t true. Insurance companies are looking balance risk and their offering today may not be there tomorrow. Also, some companies will offer “deals, discounts and other special offers” in an effort to drive sales. A good agent will know who can drive the best value for you today and that company might not have the best offer for your buddy looking for the same thing 3 years from now.

How much life insurance do you actually need?

There are a couple of ways to calculate how much life insurance you need. Although there are many fast and simple rules of thumb for calculating how much life insurance you’ll need, there is not a one-size-fits-all answer. Everyone’s situation is unique. There’s not a magic number you have to have just because of your age or gender, and don’t let anyone tell you otherwise.

The primary method is income replacement.

If something happens to me I will replace my income for X number of years. As an example:
· $75,000 per year x 10 years = $750,000
· $75,000 per year x 20 years = $1,500,000
(maybe a little more to account for inflation / promotions)

The secondary method is the capital retention method.

If I pass away I want to make sure my family has a large death benefit. With the expectation that the proceeds of the life insurance will be invested. The earnings from the investment will provide enough income to support the family and they will not (or shouldn’t have to) ever touch the invested principle.
· $2,000,000 death benefit invested in an income portfolio able to generate $60,000 $80,000 of income per year. When they pass away $2,000,000 will still be available for future generations. One isn’t better than the other, they simply accomplish different goals and leave beneficiaries with different monetary playbooks to execute if the insured passes away.

Key information to help figure out how much life insurance you need

1) What is your budget? How much does your family need each month to sustain their life style? (i.e. $2,000 per month, $5,000 per month, etc.) How long would it take your spouse to transition to a higher earning career or start working? How much would he or she have to earn plus benefits to protect your family’s life style?

2) What are your financial goals? Are you saving to buy a forever home after you get out of the military? Do you need a new car next year? Are you planning on funding a couple years of college for one or more of your children?

3) Do you plan on going career in the military or are you thinking about serious about leaving before retirement?

4) If you passed away would your spouse qualify or be able to inherit your pension and medical benefits?

5) How much SGLI insurance do you have now?

Generally speaking as we get older we need more life insurance. Often life becomes more costly when you get married, purchase a home and take on a mortgage, have kids, etc. You start to take direct or indirect ownership for future costs. Life insurance like other types of insurance is a mean to offset that risk until you no longer need it or can self-insure. For most young families they are going to need or want to replace 10 years of income.

What type of life insurance should I use?

Term Life Insurance – insurance that expires, lapses or the premium increases after a specific amount of time. (5, 10, 15, 20, 25, 30 years) Term coverage is very affordable per dollar of death benefit. Term life insurance could cover you or your spouse during your working years until your pension, or other retirement funds become available if something happened to one of you.

Permanent Life Insurance – insurance that is designed to provide life insurance coverage for your entire life. There are several types: Whole Life, Universal Life, Index Universal Life, Variable Universal Life. Permanent coverage is much more expensive and complex than term insurance.

There are a lot of life insurance choices. Which one should you choose? The main choice to make is how long do you want or need your coverage to last? If it is a specific window of time 10, 20 or 30 years, term life insurance might be the best way for you to go.
If you want coverage to protect you tomorrow and when you are 80. You might want to consider a permanent life insurance policy.

Should you use life insurance as an investment?

In general, no. Permanent life insurance that has a cash component must be built a very specific way to provide an accumulation benefit. The majority of life insurance agents have no idea how to do it. Additionally, they take a massive cut in commissions when they build a policy for max accumulation and might actively avoid doing it. Lastly, if you are using life insurance for accumulation, it isn’t advisable to put more than a couple percent of your gross income into such a strategy unless you make a lot of money, have a complex situation, goal or meaningful strategy.

If you are max funding your IRA, 401(k), TSP already, and / or find yourself super risk adverse, having a small max funded life insurance policy as a component of your overall strategy might create value for your strategy. (Again, consult a professional who can help you determine what is best for your situation)

If you have questions about your current life insurance strategy or what a second opinion, feel free to reach out for questions. I find a lot of my clients save or have the opportunity to save a lot of money having a clear life insurance strategy implemented after a complete search of the life insurance market place (over 180 providers).

Meet the Author

Kit Lancaster is Certified Financial Planner (CFP) and owner of Sterling Edge Financial LLC. He is a veteran, having served as a Field Artillery Officer in the Army from 2006 -2010. Kit specializes in serving emerging professionals and veterans looking to take their finances to the next level. (With clients in Chicago and remotely in WA, CA, AZ, CO, MN, IL, IN, NY, FL, TX, NY, MI, OH. He is also a member of most recent cohort of Bunker Labs Veterans in Residency Program (https://bunkerlabs.org/veterans-in-residence/) Sterling Edge Financial offers flat fee financial planning services, investment management and insurance.

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