Advice about the military life insurance decision

[Nords]

I'm writing a special post about life insurance for Wednesday 22 August. (Over a week away. Plenty of time.) If you're a servicemember or a veteran with life insurance advice or a story, then I could use your help. Even if you're not in the military, you might have encountered a similar situation.

The post is part of Jeff Rose's "Life Insurance Movement". Jeff's a CFP & military veteran who blogs about financial planning at "Good Financial Cents". He started a similar awareness campaign last March for Roth IRAs, and it was a widespread success. Over 140 bloggers contributed their posts, and Jeff sponsored additional events. Jeff has learned a lot about cranking up a publicity machine, so this movement promises to be even bigger.
It’s Time For Another Movement – Life Insurance Style

I'll list the typical military insurance acronyms: SGLI, VGLI, & SBP. I'll also bring up other acronyms like the VA's DIC (and educational benefits) plus Social Security's survivor benefits. The VA even has a pretty comprehensive insurance calculator that includes these benefits in its algorithm. (Life Insurance Needs Calculator (U.S. Department of Veterans Affairs) )

However (as usual) this is not a benefits manual-- it's a financial guide. I'll provide links to the details but I'd rather dig into the questions behind the benefits. I'm interested in hearing from you about how you decided what amount of insurance to carry, what you expect it to accomplish, and how long you expect it to last. I'd also appreciate hearing what advice you'd like to pass on, and what you wish you'd done differently. For example servicemembers are notorious for not updating their beneficiary information after marriage, divorce, or other family changes. I want to help people avoid under-insuring, over-insuring, and having the benefits go to the "wrong" places.

Even after 22 August, I'm still interested in your input! This post will be the core of a new chapter of the next edition of "The Military Guide", with additional references & links.

 

[Gabieta]

Hi Nords,

Not sure this input will be all that valuable, but I will share a bit about our SBP/VGLI/Other term insurance/self insure decisions.

We had another baby!

And though the reason for said child wasn't to help with the life insurance issue, it did turn out to be a key factor in the overall decision.

Here are the key factors for us:

- We are both retired, bringing in our own military pensions.
- We live within (actually below) those combined pensions.
- Our savings/investments allow us to self-insure. (adequate if needed in the near future, obviously much better if not needed for some time, which, of course is our intent!)
- For extra peace-of-mind, we took out "child only coverage" on each of us. It is very cost effective, and would give the survivor 55% of the lost pension until our youngest reaches 22 (we will be in our 60's by then!)

For some reason, answering your question just made me feel old -- I'm heading out to the gym!!

~Gabi

 

[samclem]

Nords,
I probably don't have much to add to what you've got already, but here are some ideas:
-- I bought SGLI while on active duty--it was inexpensive and I wanted the "official insurance" so DW could be sure of getting a check through the "official" channels that any casualty support officer would be most directly able to influence.
-- I bought a USAA Universal Life policy and paid on it for about 8 years. Somehow I got it into my head that a UL policy would be a good investment. It wasn't, and USAA was even helpful in suggesting I explore alternatives.
-- In addition to my SGLI I also had term life policies with USAA (I replaced the UL policy with a 15 year term policy) and one offered through the Armed Forces Benefits Association. Buying from several companies was an attempt to assure a little diversification. I was sure all the companies would pay off, but if there was any question about my status (MIA, presumed dead, etc), some delay due to a line-of-duty determination investigation ("we know he's dead, but we have to complete this before we notify SGLI," etc), or if a particular insurer was swamped with a lot of claims, I wanted DW to at least get an early check from someone while the situation sorted itself out. Buying from several companies didn't cost much/anything more.
-- The government-offered life insurance for those in retirement (VGLI) didn't seem to be a very good bargain, I could do much better through USAA (the situation could be much different for someone with health issues). But, I still took out a tiny policy, my present premium is $3.60 per month. I did this because on at least two other occasions in the past (VEAP-->MGIB-->post 911 GI bill and also the TSP) I found that having an account opened under one program later allowed me to enroll in a future program that was better. So, this is a cheap "foot-in-the-door" in case that happens again and this program morphs into something better. At worst, it it will provide a small check for DW if I check out earlier than planned.
-- Regarding how much to buy: we did the normal calculations, and wanted to assure there would be enough to assure DD's choice of higher education would be covered at least as well as if I'd remained alive and at work. In this regard I think the situation is about the same as for those not in the military. There is one "gotcha" for those in uniform: The laws have changed so that the spouses of those killed in combat or while on active duty today enjoy better treatment, financially, than they did in the past. The increase of the Death Gratuity to $100K, the availability of SBP payments, etc are all welcome news. But--if I were on active duty I wouldn't factor any of them into my decision regarding how much insurance to buy. The Death Gratuity is only for deaths that fall within the line of duty (which is broad--but not all encompassing), SBP is a nice supplement but (especially for younger servicemembers) it's not likely to pay all the bills and it stops if the spouse remarries. And all these benefits can be reduced or further restricted by Congress as readily as they were recently increased.

Thanks again for getting the word out on another issue of importance.

 

[dgoldenz]

SGLI/VGLI are a good deal while an active service member but the conversion cost after active duty ends is way more expensive than someone in half-decent health could get on their own. Over the course of 20-30 years, buying an individually owned policy is still usually the best option, assuming the person is insurable.

 

[Nords]

Thanks, everyone, I'm taking notes.

Gabi, we chose to self-insure as well. Once in a while I wonder if that was the right decision, but most of the time I'd rather keep the 6.5%. We have "enough" and we don't need to insure for every possible contingency. However I think the child-only coverage is a particularly good idea!

Sam, DG, thanks for the suggestions on other insurance companies. I think most families would be looking at them after active duty because SGLI/VGLI might not be enough. Are there any insurance calculators that are at least as good as the VA's benefits calculator?
Life Insurance Needs Calculator (U.S. Department of Veterans Affairs)

Here's a dumb question that I'm embarrassed to say I haven't been able to answer yet. You military retirees probably already know the answer just from experience. I know that SBP premiums start at up to 6.5% of the retiree's military pension, but does the premium ever change? Does it stay fixed for three decades, or does it go up each year with the pension COLA?

 

[samclem]

I know that SBP premiums start at up to 6.5% of the retiree's military pension, but does the premium ever change? Does it stay fixed for three decades, or does it go up each year with the pension COLA?

The SBP premium (if expressed in dollars) does go up with the COLA. As a % it stays fixed.

SBP is now more important for those on AD than it used to be. Those killed on AD in some circumstances are now medically retired so that their spouses/families receive the SBP payments. It wasn't like this in the past, leading to some situations where a guy would be badly shot up and definitely going to die, but docs (and creative/sympathetic reporting procedures) would keep the body "alive" long enough to medically retire the guy, even for 5 minutes, so his family would be able to receive SBP once he was declared dead. The revised policies have eliminated the need for such things.

Not strictly related to life insurance, but about SBP: It's been awhile since I examined this closely, but the SBP premium on first portion (few hundred dollars per month?) of "insured" retired pay is fairly heavily subsidized by the government. Taking the SBP on this amount appeared (to me) to be a "no brainer" regardless of other factors. I'll look for my sources on this, IIRC it came from an explanation sheet/web page/calculator put out by the Marines. Anyway, we decided to take the max SBP that we could get when I retired, but every situation is different. I've been happy with the choice we made. Like savings via payroll deduction, I don't miss the SBP premiums in my retired pay because I never saw that money in there to begin with.
Aloha!

 

[friar1610]

Nords,

Here are a few of the things I did:
- Life insurance.
-- Of course I took SGLI at the max level while I was on active duty. I bought a $10K USAA whole life policy back in the 70's and still have it. I debate with myself about whether or not to cash it in. (CV is about $5800, I think.) Probably never really needed that policy.
-- I also bought a Navy Mutual Aid (NMAA) "Permanent Plus" policy way back when. It's basically a whole life policy ($10K, I think) with a term policy on top of it bringing the death benefit up to about $32K at the moment. It's been paid up for a long time, so I just leave it there. Every year it earns a few bucks on the CV and that gets credited back to the term portion. Its CV is only on the basic $10K, so I'm less inclined to cash this one in as the total death benefit is a higher multiple of the CV than with the USAA policy. I figure it can be there for my "final expenses."
-- During periods when I had a mortgage or was getting kids through college, I also had Armed Forces Benefit Association (AFBA) group term to cover those costs if need be. That's pretty cheap insurance but it gets more expensive to maintain as you get older and outlive the need to cover those expenses.
-- I did do VGLI at the time I retired as I was concerned about a potential medical condition (which never materialized) that might have made me uninsurable down the line. But I never did convert at the end of the (5 year?) period so that was money down the drain. (Although it might not have been if the medical condition had materialized.)
- SBP. This decision caused me more agony than anything else having to do with retiring. I finally decided to buy enough to give my wife about $20K per year. (This was in 1996; the amount has since risen to $30K.) So, right off the top she will get $30K + my (early) SS of $20K = $50K before having to dip into the portfolio. I sometimes think I should have bought more of it, but that's water under the bridge. I noted at the time that NMAA (which sells insurance and therefore has some incentive to recommend, as many commercial insurers do, that you forsake SBP and just buy a lot of insurance from them) strongly recommends taking SBP at the max level.

Hope this helps.

 

[Gabieta]

- SBP. This decision caused me more agony than anything else having to do with retiring.

I agree with friar. I spent many a night agonizing, and did a ridiculous amount of number crunching on this one. If we weren't a dual military couple, I believe I would take the full SBP. I know there are many ways to crunch the numbers, but once you take into account you are paying with pre-tax dollars (so, really less than the 6.5%), the survivor's annuity is COLA'd, and the premiums get pulled before you ever get used to seeing them, it really seems to be a good deal. (Not to mention the peace of mind aspect for the survivor.)

And, now that you can "pay up" the premiums in 30 years, those that select SBP can look forward to another "raise" in their 70's! I have witnessed many a "high-five" in a local MOAA club as several have passed this threshold. At this stage, it definitely beats the term policy as the premiums are paid, and the coverage still stands.

Of course, it's insurance -- so it is all a gamble!

The child-only SBP premium also increases with the COLA, as samclem stated earlier.

 

[samclem]

Not strictly related to life insurance, but about SBP: It's been awhile since I examined this closely, but the SBP premium on first portion (few hundred dollars per month?) of "insured" retired pay is fairly heavily subsidized by the government. Taking the SBP on this amount appeared (to me) to be a "no brainer" regardless of other factors.

Okay, I found the additional info on this.
First, for individuals with a DIEMS of 1 Mar 1990 or later, the info which follows doesn't apply. Their SBP premium rate is a simple 6.5% of the base amount. The SBP monthly check will always br 55% of the "base amount." The base amount can be anything from $300 up to your total retired pay. Example: Retired pay is $2000/mo, you want to insure all of it, so the monthly premium is .065 x $2000 = $130. If you die, your spouse gets $2000 x 55% = $1100 per month (COLA'd)

But, for those with a DIEMS of 28 Feb 1990 or earlier, the premium for the "threshhold amount" of base is just 2.5%. This threshold amount changes every year, and in 2012 it is $747 per month (i.e. the monthly SBP premium for that $747 mo of retired pay is $18.68. The monthly SBP check that would be received by the surviving spouse is $747 x 55% = $410.86). From $745 to $1600 (in 2012) in base amount each dollar of SBP costs a 10% premium. Above $1600 the premium is 6.5%. So, buying SBP insurance on that first $747 in retired pay is cheap (2.5% rather than the "regular" 6.5 rate) and I think most folks who qualify for it should think very hard before turning it down even if they don't want the max SBP. A $410/mo check ain't a lot, but it's COLA'd and it'll be there every month.

 

[Nords]

The SBP premium (if expressed in dollars) does go up with the COLA. As a % it stays fixed.

Thanks-- that makes sense but I've learned to suspend logic when researching these questions.

The revised policies have eliminated the need for such things.

That fix was long overdue. I was on the periphery of two of those situations during my career and it was an awful time for the families. "We need to tell you about this decision right now... could you please step out into the hallway with us while the nurse checks your spouse?"

Not strictly related to life insurance, but about SBP: It's been awhile since I examined this closely, but the SBP premium on first portion (few hundred dollars per month?) of "insured" retired pay is fairly heavily subsidized by the government. Taking the SBP on this amount appeared (to me) to be a "no brainer" regardless of other factors. I'll look for my sources on this, IIRC it came from an explanation sheet/web page/calculator put out by the Marines. Anyway, we decided to take the max SBP that we could get when I retired, but every situation is different. I've been happy with the choice we made. Like savings via payroll deduction, I don't miss the SBP premiums in my retired pay because I never saw that money in there to begin with.

Okay, I found the additional info on this.
First, for individuals with a DIEMS of 1 Mar 1990 or later, the info which follows doesn't apply. Their SBP premium rate is a simple 6.5% of the base amount. The SBP monthly check will always br 55% of the "base amount." The base amount can be anything from $300 up to your total retired pay. Example: Retired pay is $2000/mo, you want to insure all of it, so the monthly premium is .065 x $2000 = $130. If you die, your spouse gets $2000 x 55% = $1100 per month (COLA'd)
But, for those with a DIEMS of 28 Feb 1990 or earlier, the premium for the "threshhold amount" of base is just 2.5%. This threshold amount changes every year, and in 2012 it is $747 per month (i.e. the monthly SBP premium for that $747 mo of retired pay is $18.68. The monthly SBP check that would be received by the surviving spouse is $747 x 55% = $410.86). From $745 to $1600 (in 2012) in base amount each dollar of SBP costs a 10% premium. Above $1600 the premium is 6.5%. So, buying SBP insurance on that first $747 in retired pay is cheap (2.5% rather than the "regular" 6.5 rate) and I think most folks who qualify for it should think very hard before turning it down even if they don't want the max SBP. A $410/mo check ain't a lot, but it's COLA'd and it'll be there every month.

I've seen briefing slides that say about 40% of SBP is paid for by the govt, which is why the civilian insurers can't begin to compete with it.

- SBP. This decision caused me more agony than anything else having to do with retiring. I finally decided to buy enough to give my wife about $20K per year. (This was in 1996; the amount has since risen to $30K.) So, right off the top she will get $30K + my (early) SS of $20K = $50K before having to dip into the portfolio. I sometimes think I should have bought more of it, but that's water under the bridge. I noted at the time that NMAA (which sells insurance and therefore has some incentive to recommend, as many commercial insurers do, that you forsake SBP and just buy a lot of insurance from them) strongly recommends taking SBP at the max level.
Hope this helps.

As you & Gabi say, we spent almost as much time on this as we did on deciding whether to pay off the mortgage(s).

As I get older I find myself saying "Gosh, what a great deal, we should've taken it." But in 2002 it was not at all clear that our ER budget could afford to surrender 6.5% of my pension. And when spouse starts collecting her pension in 2022, it makes no sense for me to skim 6.5% off it either.

I don't have the statistics to back this up, and I don't think the population of dual-military retirees is big enough to validate the statistics, but two COLA'd pensions (plus Social Security, plus Tricare) probably don't need to be insured. And those who've "paid up" their SBP in their 70s are probably not spending the money, either... I'm glad I had that extra $2500 to spend last year.

 

[deserat]

Ok - we just went through this for my husband's retirement - it made for some interesting and intense conversations - it ended up being about more than the SBP. Our case is a bit more complicated due to this being both our second marriages and his having children with his previous marriage and me not. It also is quite an emotional subject as it brings out the different perspectives one has about money, insurance and risk tolerance/security. Not only that, but the ordeal is quite a serious one as the miliitary requires your spouse to sign the paper and get it officially notarized. At the same time we were doing this, there were several other couples having this discussion - their answers were different due to their circumstance. If you have a more traditional marriage, chances are you would not do what we did. In fact, several of the wives I spoke with were adamant about having the SBP as they had pretty much depended on their spouse as the bread-winner while they raised children and kept the home (endless moves, different locations, which might be hostile to career aspirations of any trailing spouse).

Our situation - husband is active duty retired as of December of last year - I am a Reservist still serving. I also have a small pension coming at age 65 from my civilian career. We are both still quasi-working and are basically padding the portfolio.

My main concern was that if he died before my Reservist pension kicked in, I would have to draw down on my retirement investments earlier than I anticipated or really care about having a job versus just doing consulting because I like what I do and it interests me - the mindset tends to change your outlook. Additionally, I would be responsible for ensuring that certain parts of the estate were properly allocated to his children which may make me work more as well as that may cut down on available assets.

His concern was the overall cost of the SBP - there is a significant dip in one's take home and the amount that is given to the surviving spouse is significantly less as well as his aversion to any type of insurance annuity product at all.

We ended up purchasing a term policy covering him if he died in the gap between his retirement date and my Reserve pension allocation date - in my case, if I died before him, he still has his pension and would inherit quite a bit of tax-deferred and after tax accounts.....

This is an example of two different people having different financial benefits.... his was his military retirement which is available earlier - mine is the fact that I had to diversify and have many different streams of income for retirement based on my different career decisions (Reserves versus active, staying with a company long enough to qualify for their small DBP, investing much earlier in any tax-deferred account possible when I was working in my civilian capacity), and I will officially retire later than him.

 

[Nords]

In fact, several of the wives I spoke with were adamant about having the SBP as they had pretty much depended on their spouse as the bread-winner while they raised children and kept the home (endless moves, different locations, which might be hostile to career aspirations of any trailing spouse).

Makes sense... good thing it's the spouse's decision, too. That'd be a harbinger of domestic relations for the remainder of their married life together.

We ended up purchasing a term policy covering him if he died in the gap between his retirement date and my Reserve pension allocation date - in my case, if I died before him, he still has his pension and would inherit quite a bit of tax-deferred and after tax accounts...

That also makes a lot more sense than 30 years of SBP payments. But remember last year when Suze Orman raked that AF couple over the coals for doing the same thing, and then told them to get their butts back to employment?
Suze Orman advises a dual-military couple | Military Retirement & Financial Independence

 

[Bimmerbill]

When I was an S1 officer in the National Guard I usually suggested everyone buy SGLI. For the cost its a great benefit.

I am struggling with the SBP right now. Mine is reserve component SBP, for a gray area retiree.

After my divorce I have 1 year to change it. I am debating changing it to child only, but my pension doesn't start for another 14 years. I think when I get to age 60 I have to retroactively pay it? And by the time I am 60 my kid will be too old to benefit from it (possibly a few years left if she is in college).

 

[Greg V]

While AD and Active Reserve I had full SGLI plus a USAA Term Policy. In ~15 months when I reach Age 60 and start getting my Military Annuity, I will not take VGLI.
When I retired Civil Service earlier this Summer I elected to keep basic FEGLI with 75% reduction. I have one year's salary as the benefit until Age 65 when my premium ends and the benefit reduces at the rate of 2%/month to 25% of the original amount and remains as a benefit for the duration...with no premium. While we essentially self insure, this is a hedge against immediate expenses upon my death.
The USAA term policy will end in a couple of years coincident with me receiving both my Civil Service and Military annuities.
I took full RCSBP and the Civil Service Survivors Annuity which is similar...10% reduction in annuity vice the RCSBP which is 6.5% plus additional premium based on when you started coverage for the "gray area."
While you can fiscally make a good case for buying life insurance to cover the loss of annuity income upon death, I preferred a guaranteed, indexed income stream for my spouse. It also did not require her to make investment choices to get the income and insulated her from being preyed upon by unscrupulous investment advisors with designs on the life insurance proceeds
Hope this helps.

 

[Nords]

I am struggling with the SBP right now. Mine is reserve component SBP, for a gray area retiree.
After my divorce I have 1 year to change it. I am debating changing it to child only, but my pension doesn't start for another 14 years. I think when I get to age 60 I have to retroactively pay it? And by the time I am 60 my kid will be too old to benefit from it (possibly a few years left if she is in college).

First, thanks for your blog comment on the value of a Reserve point! My spouse and I were driving ourselves nuts trying to remember where that info came from. As she approached her 20 good years, sometimes that number was the only thing getting her out of bed for the drill weekend.

Second, definitely take your spouse off the paperwork, because if you die tomorrow then she gets the benefits. I've heard too many sad stories about insured servicemembers who meant to change their beneficiaries... they really meant to update that paperwork... they were going to update that paperwork the very next time they saw the admin staff...

Third, you might want to take another look at the RCSBP:
The Reserve Component Survivor Benefit Plan | Military Retirement & Financial Independence

I think the numbers will persuade you to add your daughter to your RCSBP policy now! If you add her tomorrow, it costs you nothing for the next 14 years. At age 60 you'll be required to pay two years' worth of premiums before you can cancel. But if you die on the day after tomorrow, she'll have some pension from you with a COLA to get her to that college age.

I don't think you can buy any term insurance that will cover you for the next 14 years at a cheaper price. Your biggest issue will be making sure the RCSBP funds are custodied by a trustee (since your daughter will still be a minor) who will make sure the funds are used the right way.

 

[HawkeyeNFO]

I really appreciate the SBP discussion, it is a program that the command financial specialists don't get enough info about, and most people simply do not fully understand.

As far as insurance, I am using Navy Mutual. For a while that's all I had, after canceling SGLI due to Navy Mutual being a better value. Currently I have both, but I think that NMAA has better rates than SGLI for those who are eligible.

 

[Bimmerbill]

Thanks Nords. I wasn't aware of the 2 year payment procedure. Definately worth thinking about.

I'm trying to find the historical value of a retirement point charts. Just because I like to see my "free" raise!

 

[Nords]

Well, it's 22 August on the East Coast, so here are the links.

Jeff Rose's post isn't live yet, but when it's live it'll be here:
Life Insurance Movement Details

When it goes live, it should have Jeff's post and links to 118+ other blog posts. (If you're looking for good personal-finance blogs, this is a pretty comprehensive directory of the more motivated bloggers.) Until Jeff's post goes live it redirects to a page giving the details of how the movement is set up.

Here's the post in The Military Guide blog:
Military insurance: SGLI, VGLI, SBP, and other benefits | Military Retirement & Financial Independence