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Military Finances 101: Permanent Versus Term Life Insurance

Insurance

What Is The Difference?

There are basically two types of life insurance. Permanent and Term. Permanent insurance stays in effect for as long as you live...assuming you pay the premiums. Term insurance stays in effect for a set amount of time...again, assuming you pay the premiums on time.

There are different flavors of permanent life insurance. The grand daddy of all of them is whole life. The death benefit of a whole life insurance policy has two portions. A cash value which you can think of as a savings account and an insurance benefit. When the policy starts, the premium paid is more than what is required to provide for insurance and expenses. This excess is deposited into that savings account. As the cash value grows, the amount of insurance required decreases. This allows the premiums to stay level even though the probability of dying increases as age increases. In fact, at some point (age 120 in most cases) the cash value will equal the death benefit and the policy is said to endow and the death benefit will be paid out. There are variations on whole life.

The first variation is universal life. The basics of a universal life policy are the same as a whole life policy. There is an insurance segment and cash value. Universal life policies add flexibility. In a universal life policy you can vary your premiums as long as your cash value to insurance ratio stays within boundaries (and there are several). This may allow you to pay higher premiums when times are good and get ahead to hedge against bad times or maybe stop paying completely. Or conversely, when you are young you could pay the minimum and increase payments as your income increases. Like above this may allow you to stop making payments or to access some of the cash value for other uses. The amount of income you receive on the cash value depends on the terms of the policy but could be a set amount or tied to an index. A second variation on whole life is Variable Universal Life which adds the ability to chose from a set of investments, normally mutual funds, in which to invest the cash value.

Term life, on the other hand. Doesn't have many variations. You essentially buy insurance without any cash value for a set amount of time. The purest form of term life is called Annual Renewable Term (ART), which is a policy that renews every year with an increasing premium over time. At some point, the premium becomes too expensive for most of us. At the other end of the spectrum is 30 year term which seems to be the top end for length of term, though there may be longer ones I'm not aware of. In this case, you will pay a level premium for 30 years and at the end of the 30 years the policy ends and if you're still alive, celebrate...put you won't get any of your premiums back. You can normally get term policies in 5 year increments.

Many employers offer term insurance for the time you are employed there. In fact SGLI is group term life insurance which ends when you leave the military. VGLI is also group term, but it is not tied to employment. Many organizations also offer group term policies.

Is Term or Whole Life a Better Choice for Military Members?

Like they say at the Weapons School...it depends. I like to ask this question to start to determine which one is right.

"Is the insurance for "if" you die or "when" you die?"

You're probably thinking I'm crazy at this point. We all die. Yes. But not all insurance needs to be in place when we die. Let me explain.

If you're saying to yourself things like, "If I died before the kids start college my kids will need money to pay for school" or "If I die before age 70 my spouse will need funds until Social Security benefits are their highest" or "If I die before the mortgage is paid off, my spouse will need funds to pay it off" (I'm not a big fan of this one), a term policy will probably solve your problem.

Conversely, if you're saying things like, "When I die I want funds available to guarantee my final expenses are funded" or "When I die, there will be state estate taxes due that need to be paid" or "When I die, the company I founded need to have funds to buy my shares", a permanent policy sounds appropriate though it might not be owned by you.

This is one way to frame the question, but not a complete evaluation. If you'd like to chat about it, give us a call.



If you liked this article, you might enjoy the following blog posts:

 

Military Finances 101:  SGLI


To SBP or Not SBP?  That is the Question


3 Reasons Female Military Spouses Should Plan for Widowhood and What They Can Do to Prepare




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