“Have a plan.” It is a basic tenant of the military career. We create action plans, ceremony plans, deployment plans, but have we ever made a personal financial plan for our families to follow if we were not there any more? I believe Life Insurance is an important part of that conversation. Unfortunately, the financial planning conversation is easily avoided and unscrupulous salespersons and bad press have skewed the real benefit and purpose of life insurance. The reality is that life insurance is an extremely important part of financial planning and a necessity if you have any debt or family that count on you for income.
The basics of life insurance are easy: you pay, the insurance company covers you and, if something happens to you, the insurance company pays your beneficiaries. However, the choice of what company, what plan and how much coverage you need begins to muddy the waters very quickly. Exploring the basics of life insurance may help alleviate some confusion.
There are two basic types of life insurance – and each has its own place in your financial plan. The first is a temporary form of life insurance called Term Insurance. Like car insurance, you pay for a specific term (usually 5-30 years) and if something happens to you during that term the insurance company covers your beneficiary, if nothing happens to you during the term there is no benefit. The second type of life insurance is Whole Life – and it is exactly that, for your whole life. The catch here is that most Whole Life policies expire at age 100. If you make it that far, congratulations, the life insurance company will simply return the money you paid into the plan.
While on active duty, every member of the military is automatically covered with a term life insurance called Servicemembers Group Life Insurance (SGLI) that defaults to $100,000 in coverage when you join the service. You can purchase an additional $300,000 if you choose. SGLI coverage goes away when you leave the military (retiree, separated or discharged) and is non-transferable. Military members can also purchase term life insurance from various insurance companies outside the military. Remember that term insurance is temporary and only covers you for a specific period. Experts suggest using term insurance for special expenses like covering yourself while you owe on a mortgage or when you are young and have dependents that count on your income.
Whole life insurance is different in that the premiums are “averaged” over your life expectancy and then you pay that same premium regardless of changes in age or health. Whole life insurance is described as “more expensive,” however, in reality it generally costs the same as term insurance but you are paying for premiums you would normally pay when you are older if it were term insurance. It is like pre-paying for insurance you will need later in your life. The underlying “cash value” of the stored pre-paid premiums provides an additional benefit that grows tax deferred at fixed interest rates. Part of the premium you pay goes towards the insurance policy, another goes towards administrative expenses, and the balance goes towards the cash portion. This type of insurance is usually beneficial for younger individuals who have additional income where they can pay the increased cost of the insurance and have identified a need for insurance beyond their debt and loss of family income such as creating an estate, paying final burial costs or paying for a child’s college.
Beyond the traditional types of life insurance there are a number of hybrid products such as universal life or variable life insurance. These different life insurances combine movable premiums, death benefits, or underlying investments with the traditional frame works of term or whole life insurance.
Universal life is most commonly known for its flexible premiums or death benefits. This type of insurance is used when future incomes are unknown, but a longer-term policy is wanted. Variable life insurance is known for using market rates to grow the underlying cash value instead of traditional fixed rates. BE CAREFUL, markets can go up just as much as they can go down. Investigate your policy and its provisions carefully before considering using a variable life product.
Variable Universal Life is a combination of universal and variable life insurance (thus the name) and provides more flexibility when it comes to adjusting the premium, death benefits, and investment choices. Remember, all of the investment risk falls on you, the policyholder, so the death benefit value can rise or fall depending on the investments. This type of policy is also subject to the Securities and Exchange Commission’s regulation since it is technically classified as a security.
Like any financial investment, it is important to know your options and make a calculated decision about what is right for you. With life insurance, this decision is mostly for your beneficiaries. It can also serve for your own piece of mind knowing your family is financial taken care of should anything happen to you. No one ever likes to talk about life going on after they pass, but it is inevitable. The only real question will be whether you took the necessary steps to plan for and protect your family. Planning for life insurance is essential, not only because it is a monthly expense, but also because it ensures continuation of your family’s standard of living after you are no longer there. Plan early, plan often, re-evaluate your family’s needs, make annual life insurance reviews part of your financial planning process. You will sleep much better knowing you have taken the proper steps to insure your family’s success even if you are not there.
Jonathon Rowles Captain, USMC (Ret.)
Disclaimer: (have to do it) – This blog should not be considered financial, investment, legal or tax advice. Consult your licensed financial professional, tax advisor or legal counsel. This blog is for educational purposes only.