By Hank Coleman
Posted in Articles
Many life insurance companies and financial planners recommend that people purchase an amount of life insurance that is equal to a certain multiple of earnings. For example, many financial planners use the rule of thumb, 10 times annual earnings, as a yard stick for a person’s insurance needs.
Generic rules of thumbs such as this one fail to take into account the many variables of life. Life insurance needs vary widely between individuals based on the size of one’s family, income levels, existing financial assets, and financial goals that the family has. So, do you need extra insurance in addition to what is provided by the military? What should you consider when looking for that insurance?
Servicemembers’ Group Life Insurance, or more simply just the acronym SGLI, is a low-cost, group life insurance for members of the military on active duty, reservists, members of the National Guard, cadets and midshipmen of the four service academies, and members of the Reserve Officer Training Corps (ROTC).
For $.065 per $1,000 of insurance coverage, members of the military can receive up to $400,000 in group life insurance for the length of their employment by the government for the low price of $26 per month if the maximum level of insurance is chosen.
I recently went online to try and replicate the SGLI insurance rates for a typical military man, a smoker, 21 years-old requesting a 20-year term insurance for a $400,000 payout with commercially available insurance companies. I was blown away by the rates that I was quoted.
Similar policies to SGLI readily cost between $46 and $64 per month for similar coverage. While my little experiment is not 100% scientific, it gave a good proxy to SGLI and showed how valuable the insurance is to military men and women.
But is $400,000 enough insurance coverage? Before the Global War on Terrorism, SGLI was capped at only $250,000. These figures seem astronomical to the new soldiers, sailors, Airmen or Marines just entering the force directly from basic training especially if they are young without a family to support.
A brand new Private in the Army earns only $1,447 per month or $17,364 per year in base pay while living in the barracks and having Uncle Sam pick up the tab for all his meals at the dining hall on base. A $400,000 insurance policy is over 23 times that Private’s annual income.
So, in that instance, SGLI is probably more than enough money to help his mother and father bury him should his unfortunate death occur, and no one is counting on his income to survive off of.
Now, compare that to an Army Captain with eight years of military service who earns $5,373 per month in base pay before his housing allowance is even considered. That Captain probably has a family to support as well, kids to put through college, a mortgage, and tons of responsibility.
Having $400,000 in insurance benefits from SGLI does not even cover 10 times his annual income. When you include his housing allowance, it might not even be five times his annual income. In that case, SGLI is probably not enough insurance coverage for the amount devastation and disruption his immediate family and children will feel from his death.
There are a lot of financial needs that families go through when they lose a loved one and especially when they lose the breadwinner of the family. Not only are their immediate funeral costs, but there are also installment debts such as car payments, probate fees, possible estate taxes, income needs, and special needs of that family.
A person in the military, and anyone who is considering purchasing additional insurance, must also calculate the needs of the family’s survivors. Insurance should provide income to cover monthly mortgage payments, future college tuition bills, emergency fund payments if needed, possible retirement income, income until the youngest child reaches the age of 18, and also a readjustment period for the first year or two while the family adjusts to a new standard of living without its breadwinner.
Is SGLI enough insurance for a member of the military? The answer is difficult to say yes or no to. It is more like a maybe. As a Soldier’s needs and family situation changes, his insurance needs will change as well. It is important to continually reevaluate your insurance needs after life changing situations such as a wedding, birth of a child, home purchase, car purchase and others.
Do not blindly assume that the maximum amount of SGLI coverage allowed will be more than enough for your survivors. There are a host of factors to consider when deciding whether or not to purchase additional insurance.