Life Insurance After the Military – What Happens to My SGLI Policy?

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A common question that I’ve heard is, “What happens to my life insurance (SGLI) when I leave the military?” This is a very important question, and one that you should address when you’re looking to either retire or separate. There may be times where you decide that VGLI is not worth it.  This is especially…

A common question that I’ve heard is, “What happens to my life insurance (SGLI) when I leave the military?”

This is a very important question, and one that you should address when you’re looking to either retire or separate.

There may be times where you decide that VGLI is not worth it.  This is especially true if you’re young, single and do not have dependents.  You may also decide that it’s the only choice for you, if other options don’t look feasible.  Either way, this article seeks to:

  • Inform you of what your insurance situation can look like
  • Provide a rough overview of things you should consider as you’re going through your transition.

You can also find a LOT of information on the VA’s website:  http://www.benefits.va.gov.

What is Servicemember’s Group Life Insurance (SGLI)?

Servicemember’s Group Life Insurance (also known as SGLI), is one of the best deals going, in terms of life insurance.  It is regarded as some of the cheapest group life insurance you can find, anywhere.

  • SGLI requires zero underwriting, and all servicemembers pay the same rate regardless of sex, age, physical condition, or smoking status.
  • All servicemembers are automatically enrolled for the maximum coverage, $400,000, and pay $28.00 per month for this coverage., though you can opt out if you wish.

Additionally, SGLI allows servicemembers to be eligible for two other types of coverage:

TSGLI provides additional traumatic injury coverage to all servicemembers covered under SGLI, and costs $1.00 per month.  FSGLI is available as additional life insurance for your spouse (up to $100,000) and dependent children ($10,000).  Coverage is available for dependent children at no cost, while the spousal premium ranges from $5.00 per month (for ages 34 and below) to $50.00 per month (for ages 60 and older).  Needless to say, SGLI is a good deal.

What Happens to My Life Insurance When I Leave the Service?

The first thing to realize is that SGLI is only available for 120 days after separation from service or retirement.  Your TSGLI & FSGLI are dependent upon your ability to maintain SGLI coverage, so you will also lose that coverage when you are no longer eligible for SGLI.  However, the VA does give you several options to transition from SGLI to similar post-military coverage.

Option 1 – SGLI Disability Extension.

If you have a total disability, you may be eligible for SGLI Disability Extension.  This extension provides free coverage for up to 2 years after separation.  If you have a disability and think you may qualify, you should go to the VA website for more information.

Option 2 – Convert SGLI to a commercial life insurance policy.

Servicemembers have the option of converting their SGLI to a permanent commercial policy.  As long as this is done within 120 days of separation from service you don’t have to prove good health.  However, this option includes converting to a permanent policy, such as a whole life policy, which can be much more expensive than term insurance. Veterans do not have the option of converting SGLI to a term life policy.

Please be sure you know the difference between a whole life policy and a term life insurance policy. Most fee-only financial planners will advise clients to steer clear of permanent insurance policies because they are more expensive than term policies. Most fee-only financial planners will advise clients to steer clear of permanent insurance policies because they are more expensive than term policies and your money can be better utilized elsewhere.

Option 3 – Convert SGLI to VGLI.

Also known as Veterans’ Group Life Insurance, VGLI allows you to continue the same level of coverage without having to prove good health.  You will pay more money for VGLI life insurance premiums, which are based upon your age.  However, the premiums are the same for men and women, and do not take into consideration any of your medical history (provided you convert your policy within 120 days of separation from service).  Converting your SGLI policy to a VGLI policy might be a viable option if you have health-related concerns that might prevent you from obtaining a good term policy.

There is another life insurance option, not provided by the VA, which you might want to investigate.

Purchase a Commercial Term Life Insurance Policy

For a lot of people, term insurance is an appropriate choice for several reasons.

First, in many cases, you can purchase a 10, 20, or 30 year level-term policy.  A level-term policy simply states that the premium stays the same for that period of time.  Contrast this with VGLI, where the rates go up every 5 years.  Over time, you may find yourself paying a LOT more for VGLI than you would for similar term coverage.  This is especially true for women, non-smokers, and people in outstanding health, who pay the VGLI rate as men, smokers, and people in poor health.  Commercial policy underwriting takes many factors into consideration when pricing out a policy.

Second, you can provide yourself much more protection.  While this article won’t tell you how to determine how much insurance you need, there are many cases in which $400,000 coverage just doesn’t begin to address the loss of income and savings potential over the insured’s career.  A commercial policy can cover much more than the VGLI amount, which can make a significant difference in your beneficiary’s quality of life in the case you die.

How do I Know Which Life Insurance Choice to Make?

You need to consider your options.  For a lot of people, a term life insurance policy might be feasible, because they don’t have many underwriting concerns.  However, if you think you might have concerns about the underwriting process, you might find that VGLI is a better option.  Either way, you probably won’t know for sure until you start the underwriting process.

Start the life insurance process early

You will want to start researching insurance at least a year before your transition, for several reasons:

  1. The underwriting process might take a while. If your underwriting decision comes back with results that are different than you expected, you’ll want to have enough time to consider VGLI or going through the process with another insurance company.
  2. You’ll want enough time for your disability claim, whether or not you are sure that you’ll file one. You might not file a disability claim.  However, if you file a claim before applying for insurance, you’ll be asked to disclose any related information.  This can include any information related to the claims process (such as:  “Have you ever filed a disability claim?”).  This might impact the underwriting decision.

If you do not intend to file a claim at the time you apply for insurance, you can obtain a policy without having to disclose health concerns that you don’t know about.  If, after you’ve obtained a policy, you change your mind and decide to go through the VA’s disability claims process, the insurance company cannot change your contract as long as you did not misrepresent or knowingly omit relevant health information during the process.

There’s a fine ethical line here, but the point is simple.  During the disability claims process, you might uncover conditions you never knew even existed.  For example, sleep apnea is a very common problem servicemembers have, but don’t discover until they get their VA physical.  Applying for life insurance after you’ve uncovered health concerns can impact the cost of your coverage, or even your ability to obtain coverage.

  1. You don’t want to make this decision while trying to juggle the rest or your transition. Unlike your final PCS, job hunt, and a lot of other transition-related efforts, you can make your life insurance decision well in advance.  So, you may as well make your decision, budget accordingly, and focus your efforts on the more time-sensitive concerns.

Figure out your life insurance needs

While you can get quotes from USAA, Navy Mutual Aid, or any number of insurance providers, you need to think about what insurance is for.  It’s to replace long-term earnings potential.  If you don’t think that you’ll earn more than $400,000 over the course of your post-military career, then perhaps VGLI is right for you.

Most people probably believe that they will earn more than $400,000 over the next 20-30 years…if that’s the case, you should think about what you’ll plan to earn.  You don’t need to try and replace your entire earnings potential.  However, you might find that a $1 million to $2 million policy will protect against that loss of income, while allowing you to protect your major assets:  house, cars, college savings, etc.

Price-shop for 20 or 30-year term life insurance quotes

If you decide that you’ll need to pursue a commercial policy, how do you do so?  How do you choose between 20 or 30 years?  That is simple, yet difficult.

Simple, because your insurance policy should cover you for the period of time that you expect to have an insurable loss.  In other words, if you die, you do not have retirement assets for your spouse or beneficiaries to live on.

Difficult because most people don’t know how long they plan to keep working 20 or 30 years in advance.  You may decide that 20 years is all you need, but if you’re in doubt, you might want to look into a 30 year term as well.

Budget for the insurance choice

Whatever you choose, it WILL be more expensive than SGLI.  Make sure you take this into consideration well in advance of your separation or retirement.  This should be a permanent part of your budget.  With term insurance, your rate will remain the same for the term of the policy.  However, with VGLI, you’ll have to account for the rate change every five years.  For example, rates go up when you transition from age 30-34 to age 35-39.  You can see the latest VGLI rates here.

Conclusion

Choosing a life insurance plan for your post-military life can be a daunting task.  However, it is important that you think about your insurance needs so that you make the right decision.

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About Forrest Baumhover

Forrest Baumhover is a Certified Financial Planner™ and financial planner with Lawrence Financial Planning, a fee-only financial services firm. As a retired naval officer, Forrest helps veterans, transitioning servicemembers and their families address the financial challenges of post-military life so they can achieve financial independence and spend more time doing the things they love.

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