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Military Finances 101: Life Insurance Thumbnail

Military Finances 101: Life Insurance

Retirement Funding Insurance Estate Planning

The military offers you SGLI and it is a form of life insurance. But there are many other choices: Whole life. Variable universal life. Term. What do these descriptions really mean?

All life insurance policies have two things in common: They guarantee that they will pay a death benefit to a designated beneficiary after a policyholder dies (although the guarantee may be waived if the death is a suicide occurring within two years of the policy purchase). All require recurring payments (premiums) to keep the policy in force. Beyond those basics, the differences begin.

Some life insurance coverage is permanent; some not. Permanent life insurance is designed to cover you for your entire life, not just a portion, or "term," of it, and it can become an important element in your retirement planning. Whole life insurance is its most common form.

A whole life policy's cash value grows with taxes deferred. 

Whole life policies accumulate cash value. How does that happen?

An insurer directs some of your premium payments into a reserve account and puts those dollars into investments, typically more conservative ones. The return on the investments influences the growth of the cash value, which builds up according to a formula the insurer sets.

After a while, you gain the ability to borrow against that cash value. You can even cancel the policy and receive a surrender value. Premiums on whole life policies, though, are usually higher than premiums on term life policies, and they may rise with time. Beneficiaries can only receive a death benefit and not the policy's cash value when a whole life policyholder dies.

Universal life insurance is whole life insurance with a key difference.

Universal life policies also build cash value with taxes deferred, but there is the chance to eventually pay the monthly premiums out of the policy's investment portion.

Month by month, some of your premium on a universal life policy gets credited to the cash reserve of the policy. Sooner or later, you may elect to pay premiums out of the cash reserve, so the policy essentially begins to pay for itself. If all goes well, a universal life policy may have a lower net cost than a whole life policy. However, if the investments the insurer chooses severely under-perform, that can create an issue with the payment of the policy. If the cash reserves dwindle enough, the policy could end up being accidentally canceled if increased premiums aren't paid.

What about variable life (VL) and variable universal life (VUL) policies?

VL policies are whole life or universal life policies with a riskier investment component. In VL and VUL policies, you may direct percentages of the cash reserve into investment subaccounts managed by the insurer. Assets allocated to the subaccounts may be put into equity investments of your choice as well as fixed-income investments. If you choose equity investments, you and the insurer assume greater risk in exchange for the possibility of greater reward. The performance of the subaccounts cannot be guaranteed. As an effect of this risk exposure, a VUL policy usually has a higher annual cost than a comparable UL policy.

The performance of the stock market may heavily affect the performance of the subaccounts and the policy premiums. A bull market may mean better growth for the policy's cash value and lower premiums. A bear market may mean reduced cash value and higher monthly payments to keep the policy going. In the worst-case scenario, the cash value plummets, the insurer hikes the premiums to provide the guaranteed death benefit, the premiums become too expensive to pay, and the policy lapses.

Term life insurance is life insurance that you "rent" rather than own. 

It provides coverage for a set period, usually 10 to 30 years. It can also be linked to your employment. SGLI and VGLI are what is called group term insurance. Should you die within that period, your beneficiary will get a death benefit. Typically, the premium payments and death benefit on a term policy are fixed from the start, and the premiums are much lower than those of permanent life policies. When the term of coverage ends, you may be offered the option to renew the coverage for another term or to convert the policy to a form of permanent life insurance.

Term life can be cheap, but the trade-off comes when the term is up. Just as you cannot build up home equity by renting, you cannot build up cash value by renting life insurance. When the term of coverage is over, you usually walk away with nothing for the premiums you have paid.

Do you need a life insurance policy in retirement?

One school of thought says no. The kids are grown, and the need to financially insulate the household against the loss of a breadwinner has passed. If you are thinking about dropping your coverage for either or both of those reasons, you may also want to consider the excellent reasons to retain, obtain, or convert a life insurance policy after you retire. Take these factors into account and consult with your financial professional before making a decision.

Could you make use of your policy's cash value?

If you have a whole life policy, you might want to utilize that cash in response to certain retirement needs. If you need extended care, for example, you could explore converting the cash in your whole life policy into a new policy with an extended care rider. This might even be doable without tax consequences. If you need additional income, many insurers will let you surrender a whole life policy you have held for some years and arrange an income contract with the cash value. You can access the money, tax free, as long as the amount that is withdrawn is less than the amount paid into the policy. Remember that withdrawing money or taking a loan against a policy's cash value naturally reduces the policy's death benefit.

Did you Decline SBP?

If you elect(ed) to not participate in the Survivor's Benefit Program (SBP), your pension will end if you die before your spouse dies. If you pass away early in your retirement, this could present your spouse with a serious financial dilemma. If you decline(d) SBP, insurance may be necessary to protect your spouse.

Will your estate be taxed?

Should the value of your estate end up surpassing federal or state estate tax thresholds, then life insurance proceeds may help pay the resulting taxes and prevent the need for your heirs to liquidate some assets.

Are you carrying a mortgage?

If you borrowed to purchase your home or have refinanced and are carrying a mortgage, a life insurance policy may make sense. It could potentially relieve your heirs from shouldering some of or all that debt if you die with the mortgage still outstanding.

Which coverage is right for you? 

Many factors may come into play when you are deciding which type of life insurance will suit your needs. The best thing to do is to speak with a qualified insurance professional who can help you examine these factors so you can determine which type of coverage you should have.

Military Finances are Different

You have options available to you that may not be available to your civilian counterparts. That is why we think you should work with a Financial Planner/Advisor that works with Active and Retired Senior Military Officers and NCO's every day. If you'd like to find out how we do things, use the button below to sign up for a free initial consultation.

If you found this article useful, you might like the following blog posts:

Is SBP Expensive?


SGLI Ended. Don't Want VGLI. Now What?


Military Finances 101: SGLI



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