As you transition from active service, life insurance is an important, yet overlooked aspect of your post-military financial planning. In a previous article, I discussed five considerations about your military life insurance needs. To build on those relevant points, this article focuses on things that may not present themselves until your transition.
Life Insurance Consideration No. 1: Your income (and insurable need) will probably change. However, it might take some time for you to understand exactly how.
The one constant of a military career is income predictability. While you’re in the service, you can make career-related estimates based upon promotion rates in your community. Even if promotion opportunities are slight, you can usually rest assured that your income won’t go down (unless you’re PCSing to a location with a lower housing allowance, and presumably lower costs). While you might not be able to predict your income in the long-term, you know that your paycheck will come on the 1st and 15th of each month.
All this is subject to change as you leave the service. There are two changes I’ll discuss here: near-term and long-term.
Near-term: Most people have no idea of what their near-term post-military income will look like. Furthermore, many people may find that after separation their employment will change at least once. Additionally, many people may decide to go back to school in order to improve their job prospects. All of these factors (and more) can confuse the picture for what your long-term insurance needs are. Since there’s a direct correlation between age and insurance premiums (see Point 4 below), you might end up spending more money over the long term if you wait for the long-term income picture to fully develop.
Long-term: While many people experience a near-term dip in income, income levels generally go up as you age. Even if you can’t precisely project your long-term earnings or family needs, you can make educated guesses that will help inform your insurance decision. For example, if you take a year off to finish your MBA so you can get a job with a consulting firm, and you’re planning to have a child in the next three to five years, you can still factor those things into a life insurance decision.
Perhaps you don’t think you’ll obtain a life insurance policy now. In that case, you could at least run the numbers. That way, you can see if you’re better off locking in a lower rate today, or if you’ll be better off waiting. The longer you plan to wait, the more profound a difference this will be.
Life Insurance Consideration No. 2: Your life insurance benefits should be coordinated with your Survivor Benefit Plan benefits (if you’re eligible).
If you’re eligible for the Survivor Benefit Plan (SBP), you may be inclined to look at that decision as being separate from any life insurance decisions you make. You should not. Both life insurance and SBP serve to protect insurable needs, although they do so in different ways. Before making a decision on either, it’s important to evaluate how SBP and insurance may fit into your planning, and what the associated costs are. Only then are you likely to come to a decision that is right for your family.
These articles may help inform the decision-making process as you decide what is right for your particular situation:
- Understanding the Survivor Benefit Plan (podcast)
- Survivor Benefit Plan — What Does it Mean to Me?
- Why You Should Strongly Consider Not Participating in the Survivor Benefit Plan
- Term Life Insurance Vs. Survivor Benefit Plan (SBP) — A Side-By-Side Comparison
Additionally, the Military in Transition Guide to the Survivor Benefit Plan presents several case studies and some detailed analysis, which might be useful.
Life Insurance Consideration No. 3: VGLI is not as compelling as SGLI. Therefore, you need to think about the long-term cost of your insurance.
The decision to obtain Servicemember’s Group Life Insurance (SGLI) is a no-brainer. At $7/month per $100,000 of coverage, there is no cheaper insurance alternative. However, once you transition, rates start to go up for the same coverage under Veteran’s Group Life Insurance (VGLI). At its cheapest (for ages 29 and under), coverage starts at $8/month per $1,000 in coverage. This goes up in five-year increments until age 75 and older. The increases are as follows:
- 30-34: $10/month per $100,000
- 35-39: $13/month
- 40-44: $17
- 45-49: $22
- 50-54: $36
- 55-59: $67
- 60-64: $108
- 65-69: $150
- 70-74: $230
- 75+ $460
In comparison, the insurance rate outlined in my term life insurance article amounts to $195/month for $1.5 million in coverage, or $13 per $100,000. This rate is roughly in line with VGLI for a 35-year-old. Since the insurance underwriting process will produce different results depending upon your circumstances, you’ll want to at least do enough work so that you can compare the numbers in your situation.
Life Insurance Consideration No. 4: The older you are, the more expensive a commercial policy will be to start.
The first three points in this article outline some of the factors that might influence how much commercial insurance coverage you may need. This point is that by delaying their decision to obtain an insurance policy, many people drive up the cost of insurance when they eventually obtain one.
Using USAA’s online life insurance estimator, you can run the numbers yourself. If you don’t like USAA, there are many insurance companies that offer similar tools. Below are the monthly premiums that I pulled up (as of 3/19/17) on USAA’s website for a 30-year, $500,000 policy for a non-smoker with no significant medical issues and with normal weight. The only change is for age:
- 40 $57.49
- 41 $62.49
- 42 $67.07
- 43 $72.90
- 44 $79.99
- 45 $90.40
Disclaimer: Since these numbers are purely an online estimate, you may (and probably will) find different quotes for your own situation. These examples are not intended to constitute insurance advice. They are for educational purposes to illustrate the impact that age has on insurance rates. Also, quotes from an online tool may (and probably will) differ from the quotes after the underwriting process has been completed.
With that said, in this scenario, merely waiting for 5 years drives up the cost by $32.91 per month, or 57%. During the course of a 30-year policy, this would end up being a difference of almost $12,000. Even a delay of one year can result in a 5-15% increase in rates.
Why five years? Let’s think about it. In many cases, the best opportunity to purchase insurance for post-military life is a year or two before separating. This is particularly true if you’re filing a VA disability claim. However, if you haven’t already done so by the time you separate, you’ll probably be inclined to wait to see what post-military life looks like (salary, location, etc) before you actually get a policy. This period could be about five years.
There’s also an unintended secondary effect. Merely postponing the execution of a decision (in this case, purchasing a 30-year policy) without making the appropriate adjustments (like adjusting to a 25-year term, if that’s part of a financial plan) could leave you:
- Woefully underinsured during the years where you need coverage
- Drastically overinsured in later years after you’ve achieved financial independence
To clarify, the point is to:
- Emphasize the importance of planning for your insurance needs early in your transition
- Realize the impact that age plays in the price of life insurance
Life Insurance Consideration No. 5: If you decide to pursue commercial life insurance, you should do so before you file a VA disability claim.
As I discussed in a previous article about my personal life insurance policy experience, one of the questions that insurance underwriters ask is:
“Have you ever, or are you currently, filing for disability benefits?”
I don’t presume to know anything about insurance underwriting, but I imagine that answering ‘Yes’ to that question may warrant a more thorough search of your medical records. Being able to say ‘No’ doesn’t guarantee that anything will go smoothly, particularly if you have conditions or diseases that you have to disclose.
However, there are many conditions that people worry about, which insurance companies determine to be non-issues. During my underwriting process, I disclosed my asthma, high blood pressure, and a variety of other factors. My premiums came back at a preferred rate, meaning that I qualified for the lowest premiums for my demographic.
Maybe this would have happened if I’d checked “yes.” However, I’m glad that I didn’t have to find out.
Figuring out how life insurance fits into your financial plans can be a daunting process. Trying to figure it out while you’re transitioning can be even more difficult. However, taking some of these factors into consideration might help you make the decision that’s right for your situation.
What do you think? What other factors should you consider when looking at life insurance as you transition from the military?