In this show, Mike and Amy discuss Servicemembers Group Life Insurance (SGLI) and Life Insurance.

They cover:

SGLI Overview (2:12)

How to calculate how much life insurance you might need
Rules of thumb: 8-10 times income; 8-10 times expenses (3:57)
DIME Method (6:05)
Types of Life Insurance
Term (7:50)
Permanent (10:13)

Links:
Operation Retirement Readiness: www.operationretirementreadiness.com
Schedule a consultation with Mike: https://nextmissionfinancialplanning.com/contact/
Schedule a consultation with Amy: https://www.instarfp.com/contact

Transcript

 

00:00:00 Mike:

So Amy, we’re going to be talking about life insurance and SGLI today.

00:00:05 Amy:

You know, this is an area that I find people really don’t like to think about or talk about, but it’s so critically important on the off chance that something happens to you.

00:00:15 Mike:

I agree it’s not a fun topic, but super important.

00:00:20 Mike:

So we’re going to hit on How you calculate how much life insurance you might need? What are the different types including SGLI.  And how do you think about it as you approach retirement?

00:00:31 Amy:

Sounds great!

00:01:06 Mike:

So Amy, in your experience, do most military members have adequate insurance coverage?

00:01:13 Amy:

You know that’s interesting. I think it depends on the timing. So for folks early in their career, you know maybe the 18/19/20 year old, so the young 20 something that’s just coming into the military SGLI is great, $500,000 worth of coverage.  For a very affordable premium, that’s probably plenty. For most young 20 somethings. But 20 somethings have a habit of getting older and getting married and then when that starts to happen I actually find that you know there’s a chance that maybe some families are underinsured. Particularly as service members progress in rank and maybe the spouse works as well. So the situation has changed and so sometimes I do find that there’s a little bit of an insurance gap for military families.

00:02:12 Mike:

Exactly. You mentioned SGLI . It’s such a great benefit for the military $500,000 of insurance. Almost no brainer if you have anybody that relies on your income to make sure you’re signed up for that. So yeah, that’s key. And yeah, I agree. I see the same thing as things change through their lives, and especially as you bring on you know additional things can be a driver of an increased need.

00:02:52 Amy:

Yeah, completely agree with all of that and you know the nice thing about SGLI as well is that your spouse is also covered for $100,000. So you know, it provides a benefit to the service member as well as the spouse, a little bit for kids as well. And in addition, while you’re on active duty, you’re still covered by the Survivor Benefit Plan, which means that if you were to pass away, your spouse will get 55% of your high 3.  Early in your career, however, you know your high three is probably pretty low, so that may not be enough. As you know, maybe in your late 20s you’ve had some kids, you’re married, but you’re still relatively junior. You may not have quite enough insurance for your family to live the kind of life that you envisioned for them. So Mike, you know, one of the biggest questions and I know a lot of people struggle with this. How do you figure out how much insurance you might need?

00:03:57 Mike:

There there’s several ways. A couple are pretty quick and you know one we’ll talk about is a little more in depth it takes, takes a little bit more to calculate. So the first kind of rule of thumb is 8 to 10 times your income. And you know that’s total income. For military you probably want to look at the BAH and BAS that you get and you know that’s tax free. So you may want to inflate that a little bit, you know 1015% to just make sure you’re capturing your really total income that you need to cover. And take that, multiply it by 8 to 10 and you know you’ve got a rough number.

Now, if you’ve got SGLI, you can subtract that off.  And that’s kind of the delta that you’d need. The 2nd variation is very similar 8 to 10 times, but then for each child you add $100,000 for schooling; college in the future that might be a little much for you if you’re military, because if you die on active duty, there are VA programs, the FRY scholarship and and some other things that could cover education for your your children. So maybe you don’t need a full 100,000. You know, maybe it’s the last 50,000 to add.  So, those are kind of quick and easy methods for coming up with a ballpark of what you might need. There’s a more in depth one that goes by the acronym DIME and you know, for those of you in PME, it’s not the elements of power that you probably dealt with because there’s really no diplomacy in insurance. So Amy, what’s the what’s the dime method for? You know, doing more in depth insurance calculations.

00:06:05 Amy:

So the dime method for insurance calculations. The D stands for debt and final expenses. Don’t don’t forget funeral expenses. So debts are things like your credit cards, your student loan. Your car loans, potentially a mortgage, anything that you want to be paid off at the time of your death. So that’s D. Income is how many years your family needs your support. Multiply that by the cost to maintain their lifestyle so you know for the military you would subtract out those survivor benefit payments. So maybe just a quick estimate is about 50% of your current base pay, because that’s essentially what would be going away. M touched it a little bit. This is your mortgage. So instead of grouping it into debt, it has its own split out category. So If you don’t have a mortgage though, something to consider is that you may purchase a home later on. And of course, we’ll get into this later. But purchasing insurance when you’re younger is a little bit cheaper. And then the last one is education. So estimating how much your kids might need, minus whatever you’ve saved minus potentially if you’ve transferred your post 911 GI bill benefits or or VA benefits that your children might get if you pass away on active duty. So if you add all of that, then you’ve got your total insurance that you need and then you can subtract out SGLI.

00:07:50 Mike:

Yeah, I think they they broke out mortgage because if not it would be D i.e. Die and you know, probably not what you want to be using when you’re doing your insurance calculation. So yeah, like you said, add it all up, subtract out any insurance you have in place. And that’s the kind of leftover that you may need to, you know, go find some other insurance. So kind of once we have that you’re, you know you’re looking to purchase and we’ll talk now a little bit about the different types of insurance and there’s really two main types. One is term or temporary insurance. And the other main category is permanent insurance, so let’s talk about first. Term is temporary. It is for a set period of time, so you may go and buy insurance for 15-20 thirty years because you have a defined need over that time. Maybe it’s through when your kids are all the way through school. Or, you know, you’re about to hit, you know, you’re putting it in place in your late 40s and you’re going to go through your retirement when you can claim Social Security. And have all your other income turned on so that that’s that’s term. One of the hallmarks of term is it’s typically affordable, or at least more affordable than the permanent insurance. It is temporary coverage. There’s no cash value that will build up so that if you decide 10 years in, you don’t need the policy anymore, you just stop paying. But there’s no money there that you’ll get back. And, typically there’s also a renewal option as you get to the end, the insurance company will let you convert that to permanent insurance. It’s probably going to be more expensive, but typically you probably have that option. So, Amy, what’s permanent insurance and how is it different?

00:10:13 Amy:

Yeah, sure. So permanent coverage means it lasts for your whole life. And so the most common sort of basic life insurance, permanent life insurance, is whole life. And so it obviously provides coverage until death or as long as your premiums are paid. It does accumulate cash value overtime, which you can borrow against or withdraw. On the flip side, cost, term was affordable, whole life insurance tends to be more expensive. So if you think about it in terms of life insurance, from the life insurance company standpoint, you know for a term policy, the chances that you’re going to die in the next 10 years are pretty small. The chances of dying within 30 years are greater, so a 30 year policy might be a little bit more expensive. For whole life insurance, you’re definitely going to die.  At the end of your life, I mean, it just is going to happen. So for sure that life insurance company is going to payout that benefit. So that’s why it tends to be more expensive because there’s a 100% chance that there’s going to be a payout.

The other consideration is there are different types of policies, not a, not a straight whole life policy, but there’s other kinds of permanent life insurance. That allows you to have an investment component to it. Those policies are in the world of universal life, variable life, variable universal life. Those policies are well beyond. The scope of this discussion today it’s enough to just compare a simple whole life permanent policy versus a term policy today.

00:11:57 Mike:

Yeah, that’s it, quite a bit. Insurance is complex and it’s been numerous podcasts going through all the different types. But I think you’ve summed up the difference between the two very well. Any thoughts on, you know, I think I’m a big fan of term life and trying to figure out the need for overtime and having savings and investments that you’re going to rely on when you retire so that you know you can ensure while you have that need for the income. One in but you know you’re able to grow, grow your other assets to take care of that when you’re retired. Any thoughts there?

00:12:45 Amy:

Yeah, I mean, we’re going to talk more about the survivor benefit and how that fits into the overall plan for military folks who are retiring. And it’s really a critical decision because that part can be sort of the permanent life insurance portion of your overall insurance plan. So like you said, Mike, it’s it, you know, pairing term with Survivor benefit is a great idea. Term is also great if you have an end date – so children are going to grow up, they’re going to eventually finish their education. So you no longer need to be insured to cover their education, so term is great to cover those sorts of things. There’s also considerations for when additional benefits might kick in so you know if you’re purchasing life insurance in your 40s and you plan to draw Social Security at age 70. Well, your spouse will be able to get your full Social Security benefit if you pass away after each 70, so you may only need a certain amount of insurance through your 70th birthday. On the flip side, there definitely are reasons for people to carry permanent types of life insurance. If you don’t believe that your assets are going to be enough to meet any legacy goal that you have, and you definitely want to fund whatever this legacy goal is, then that might be a role that permanent life insurance can play in your overall plan.

00:14:19 Mike:

Yeah, definitely agree that there are other reasons to take insurance and maybe even put it in place like you’re saying for legacy goals late in life where it’s not really for, you know, immediate survivors that you know with your income but you want to make sure somebody has $1,000,000 and you have the ability to fund that and and pay the insurance company just to maintain that and and you know, once you die, the money will go to your hair. So great there. So as a wrap up. You know a few things. SGLI is great for military members, you know, but it might not provide enough coverage. So understanding how you calculate the need, what those things are, is critically important. The other thing is you do have a little bit of a buffer when you’re getting ready to retire SGLI and 120 days after you retire or separate from a little bit of coverage as you retire, it’s probably better to put, you know, make sure you’re insurable before you actually retire. If you’re going to put insurance in place. So thinking about that, you know, a year or two years before retirement is key.  In the next episode we’re going to talk a little more about that, about how you think about the Survivor benefit plan, how you can bring this all together and decide what is the best way to cover you, you know, either permanently or again, like Amy talked about through, you know, maybe age 70 or whenever you plan to retire and just kind of matching the the cash flows that will be needed with the insurance need that you have and and linking that all up so. Anything else I missed that we want to hit.

00:16:28 Amy:

I can’t think of anything else. I think this was a good summary of life insurance and how it can work together. I know people are going to be really curious about the Survivor Benefit Plan, which we’ll talk about in a couple weeks.

00:16:43 Mike:

That sounds great. Thanks to everybody who made it through this probably not a fun topic, but again. It’s important you hear the harder stories you know, semi-regularly of somebody unexpectedly passing away. And it makes it so much better if the family isn’t also worrying about, you know, where money is going to come from. If people have taken the time to understand what they need and and put that in place so again until next time great talking to you Amy.

00:17:22 Amy:

Good to talk to you, Mike. We’ll see you in a couple weeks.