One of the greatest gifts you can give your family is adequate life insurance.
Your life insurance coverage is designed, of course, to provide your loved ones with a means of support should something happen to you.
A good life insurance policy can provide you with peace of mind now, and take care of your family later.
But how much life insurance do you need?
Deciding How Much Life Insurance to Buy
Your first step is to figure out how much life insurance you need. The easiest thing to do is to use a rule of thumb. One of the most common rules of thumb is to get life insurance coverage that is ten times your annual salary.
So, if you make $45,000 a year, you would need at least $450,000 in coverage.
Another rule of thumb, though, is to get enough coverage to provide your family with your yearly income each year indefinitely.
A common rule is to have enough capital so that you can sustain a 4% withdrawal rate indefinitely. The idea is to put the money in an account that offers a return that allows your family to live off the interest.
This way, your family will never run out of funds. In order to generate $45,000 a year in interest at 4%, you need $1.125 million in capital. So that’s the coverage you need if you follow this rule of thumb.
Finally, you can do your own assessment of what you need. In order to do that, you add up your expected expenses for the next few years. Here’s one way to do this:
- Add up how much you need to provide your family with your annual income until your youngest child turns 18. If your youngest is five, then you need to multiply your salary by 13. In our example, that $585,000.
- Next, add up all of your consumer debt, including student loans, car loans, and credit cards. If you have $6,000 in credit card debt, $10,000 left on your car loan, and $15,000 in student debt, that’s $31,000. If you are eligible to have your student loans paid because of your service, you might decide not to include them in your calculations, so that’s $16,000.
- Consider your mortgage, if you have one. If you have $185,000 left on your mortgage, use that in your calculations.
- Other items to consider include whether or not you want to help your children with college, or if you want to help with other purchases along the way. However, it’s worth noting that as your family pays down the mortgage, the money can be used for something else.
Add up everything on your list. In this case, if you leave out the student loans, and decide not to go beyond debt, the total is $786,000.
Of course, not everything is black and white.
You need to consider needs specific to your situation.
For example, do you have a family member with special health care needs? Are you a military retiree with a pension and TRICARE for the rest of your life?
If you opted for the survivor benefits plan, then you may be able to decrease your life insurance policy if your spouse will have your pension.
Do you have a lot of savings and investments?
Some people have enough money saved to provide for their families, even if they are no longer able to contribute to the family. The possibilities are endless, so consider all possibilities and increase or decrease your insurance policy accordingly.
Special Life Insurance Options for Military Members and Veterans
Military members and veterans have special options available to them, including the government-sponsored SGLI plan, available to current military members, and the Veterans Group Life Insurance plan, which is available to veterans.
Both of these are low-cost plans available to military members and veterans.
These plans may be a good idea, since many civilian plans don’t cover deaths caused by acts of war. You can also convert your SGLI to VGLI when you leave the service.
There are also some life insurance plans offered by civilian companies which are great options for military members and veterans. One good example is life insurance from USAA.
USAA offers insurance, banking, and investment products, and limits membership to military members, their families, and children of USAA members, so they know what it means to serve.
You can check your USAA eligibility here, and learn more about their financial products.
How much life insurance do military members need?
There is no one-size-fits-all answer regarding how much life insurance you need. If you are the sole supporter of your family, then you would likely need more life insurance than if you were a single military member with no dependents or anyone else relying on your income for survival.
Where should military members buy life insurance?
For most military members, the Servicemembers’ Group Life Insurance (SGLI) program is the best option because it is available to everyone and will pay out even when the policy holder dies from an act of war or similar event (many private insurance policies have a rider that excludes death from an act of war).
The SGLI policy also includes a long-term disability rider called the Traumatic Injury Protection coverage (TSGLI).
SGLI offers great military life insurance rates. The government supported company, the Service Member’s Group Life Insurance program offers troops insurance coverage of $400,000 for only $27 per month. Here are the rest of the SGLI rates.
No longer in the military? Check out Veterans’ Group Life Insurance, which is available to veterans.
Should Military Members Purchase Private Life Insurance?
For most people, the SGLI offers the best prices and features (payment for death due to act of war, automatic disability clause). However, if you do not think the SGLI offers enough coverage, then you should consider purchasing insurance from a private vendor.
Buying a private life insurance policy. Private policies should be considered for those who believe they will need more than a $400,000 policy.
If you need an amount above and beyond the SGLI limits, then you should shop for policies through multiple providers to find the best deals.
One of the best places to start is with USAA, which is an insurance and financial company which limits its membership to military members, veterans, and children of USAA members.
Caveats regarding private life insurance for military members. Many private life insurance policies have clauses that do not cover death caused by military actions or during an act of war. Military members need to read their policy carefully before signing the contract to ensure that they are covered at all times, including during an act of war. This is where the SGLI is often better than private life insurance policies – the SGLI covers deaths caused by acts of war and other causes.
Do single military members need life insurance?
When I was in the military I noticed many of my young squadron mates purchased the maximum amount of life insurance through the SGLI.
The maximum coverage is $27 per month ($324/yr), which is a lot of money to spend when you don’t need much, if any, life insurance coverage.
If you are single and do not have any dependents, you can get away without any insurance or only the minimum. You can buy a $50,000 policy for $4.45 per month ($51/yr). A $50,000 policy should be enough to pay off most debts and cover any other expenses.
Remember, military burials are free.
How you determine what’s adequate for your family is up to you. There are different methods of figuring out how much life insurance your family needs. Ultimately it’s up to you to decide how much coverage is right for your family. The key is choose the amount of coverage that you are comfortable with, and that you feel will provide your family with what they need, for as long as they need it.