Life Insurance
Imagine if something happened to you while training, on a deployment or driving across town to get the groceries. What would those that depend on your income do to make ends meet? How would they pay the rent or mortgage? Health insurance, car payments, fund college savings accounts and save for retirement? How would their lives change? The purpose of life insurance is to provide funds and replace income for those who depend on your income.
Starting your career in the military you get early exposure and access to life insurance via Service Members Group Life Insurance. (SGLI)[i].
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.
Once you have a family, kids or people in your life who depend on your income you need to look into life insurance. Look at your options and work 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.
Types of Life Insurance – Too Many 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.
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 older (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. Which is typically a great benefit. It doesn’t cost your employer much and you get a benefit.
Outside of SGLI or your employer guaranteed issue 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. If you 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.
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 – 15 companies. Bringing the top 2-3 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 need/ Do you actually need life insurance?
There are a couple of ways to calculate how much life insurance you need. The primary method is income replacement.
If something happens to me I will replace my income for X number of years.
· $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. 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. Which for most enlisted families in the military can be covered mostly or entirely by SGLI. (Your situation maybe different however, so don’t just wing-it by mass assumption after reading the above statement)
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.
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. (Think University of Michigan’s contract to pay Jim Harbaugh to coach football)[ii]
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)
Thank You
Kit Lancaster CFP, AWMA
Financial Planning, Investments, Insurance
President
www.SterlingEdgeFinancial.com
Tracking Number - 237166
Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Sterling Edge Financial are not affiliated.