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Trimming Your Budget? The One Bill You Can't Afford to Cut

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In this belt-tightening era, financial planners, television personalities, and maybe even you and your spouse have discussed the wisdom of cutting expenses to the bare bone. Doing so often makes sense, but in many cases an unfortunate casualty of this prodigious cost-cutting has been life insurance. An important component of a sound financial plan, this type of insurance is designed to provide a measure of financial stability and security if someone passes away prematurely. So saving cash by cutting back on life insurance coverage can be a potentially perilous strategy.

Life insurance can help a surviving spouse and family members avoid a financial tailspin and maintain their lifestyle to the greatest extent possible. In my experience, families have used proceeds to replace lost income, pay off credit cards and car loans, zero out a mortgage balance, and help pay for kids' education expenses.

For Afghanistan veteran and USAA employee Kenny Sutton, the importance of life insurance was a sudden realization. When the husband and father of three regained consciousness in a hospital in Landstuhl, Germany, in 2005, his first thought was "I'm alive." The second: "I could've left my wife and kids in a real financial bind." Kenny's only life insurance was $400,000 through the military's Servicemembers' Group Life Insurance (SGLI). "I learned a valuable lesson and try to help others learn from my near catastrophic mistake."

Life insurance is sometimes mistaken as extraneous protection. The reality is that rarely can such a small payment provide so much. Life insurance premiums fit into most budgets, especially when policies are put into place while the insured are young and healthy, perhaps in anticipation of having a family. Premiums for the $400,000 coverage through SGLI run $26 per month regardless of age. Every service member should consider taking advantage of SGLI.

The right amount of life insurance is a moving target as you travel through life. Getting married, having children, or buying a home will almost certainly boost the amount you need. Unfortunately, a life insurance conversation between a consumer and a financial advisor doesn't happen often enough, and therefore you may need to initiate the discussion. It's that important. The rule of thumb is that you should have seven to 10 times your annual income in insurance coverage. However, there is no need to guess, because you can find a plethora of life insurance calculators online. It takes just a few minutes to figure out how much you need to provide adequate coverage for your family. You may discover that supplementing your SGLI is a wise move.

It's also a good idea to have life insurance to go. Employer-provided insurance is typically cheaper, but it can be dangerous to rely on that source alone. You should have a separate policy that follows you wherever you go. With that in mind, when you retire or transition from the military, a separate policy will cover you in the event of a lull in employment. Start looking for SGLI replacement at least six months before leaving the service. If you find that you can't place a competitively priced policy because of chronic illness, injuries, or tobacco use, consider Veterans' Group Life Insurance (VGLI). It's more expensive than the typical commercial term policy, but, importantly, you can avoid medical underwriting if you apply within 120 days of leaving the service.

Otherwise, you may want to consider a combination of either whole life or universal life and level term insurance. Whole life, a form of permanent insurance, is aptly named as it's there for your entire life. Because part of your payment goes into the cash value, the premiums of these policies are more expensive than other life insurance products, but many enjoy the peace of mind associated with having life insurance at every stage of life.

A level term policy, on the other hand, is good for a set period of time, such as 10, 20, or 30 years. Because of its temporary nature, it's generally less expensive and deserves consideration as coverage for big temporary expenses, such as raising and educating children or for those just looking for an affordable solution to get the coverage they need.

Life insurance is critical for most families, and there is a policy that will fit in every budget. As Sutton put it, "This is one thing you can't afford to not afford." Don't let slashing your budget crash your financial plan.

June Lantz Walbert is a Certified Financial Planner practitioner with USAA Financial Planning Services. She is also a lieu­tenant colonel in the U.S. Army Reserve with 20 years of service. Walbert's basic branch is Air Defense Artillery. She writes a weekly advice column, "Ask June," on Follow June on Twitter: @AskJune_usaa.

USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor.

This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal, or estate planning professional.

USAA Financial Planning Services is a service mark of USAA that refers to the financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, (known as USAA Financial Insurance Company in California, Lic. No. 0E36312), a registered investment advisor and insurance agency and its wholly owned subsidiary. Certified Financial Planner Board of Standards owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (16)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 26, 2011, at 1:52 AM, baldheadeddork wrote:

    Kinda fitting that the first two comments on an unpaid ad for USAA life insurance are spammers selling gold tips and whatever is behind that link you couldn't get me drunk enough to click.

    David and Tom don't need me to tell them how to run their business. Tough. If they expect to get people to pay up for premium services, they damn well better step up the quality of the public content on this site. I see this, and a dozen other painfully uninformed pieces a day, and there is no way I'd ever give you a dime for paid advice.

  • Report this Comment On September 26, 2011, at 9:27 AM, Jbay76 wrote:

    I totally disagree with this article and think those who need life insurance don't know how to invest. I recently spent a but of time with my insurance agent discussing how their life insurance policies work, how they determine their interest rates and it all boils down to investing. The rates that Liberty Mutual uses on permanent life insurance are based on how well LM invest yours and everyone else's money. When they do good, your base interest rate goes up, when they do bad your base interest rate goes back to a contractually agreed level, essentially the level it was when you signed your policy.

    I can get better returns investing in closed end funds paying out 6-9% dividends and reinvesting that money than making monthly payments to LM or any other life insurance policy. If you want life insurance, work for a company that offers it as they assume most of the financial burden than you would if you took on a personal life insurance plan outside of work.

    The only thing that life insurance does is force you to make monthly payments. If you can't be disciplined enough to make monthly contributions to an investing account that can provide security when you need it, then by all means give your money to someone else who will only give you a portion of the gains they get from investing your money. Either which way, its going to get invested.

  • Report this Comment On October 01, 2012, at 3:59 PM, alanbloom wrote:

    As an economics major in college and an attorney, I find this article disturbing. For one, there is an old adage that goes "term life is bought, whole life is sold." There is no conceivable reason for anyone to buy whole life, a vehicle by which an insurance company pays a fraction of what it earns on your premiums back to you.

    Term life is intended to cover the living expenses of those who are dependent on your income, (e.g., minor children and unemployed spouse) until they can support themselves, not necessarily "7 to 10 years." I see many soldiers who are single with no children pay for SGLI when they would be better served putting that $300 a year in a Roth IRA.

  • Report this Comment On August 07, 2014, at 5:10 PM, firetamer35 wrote:

    im new to investing I I have 5 years before I have to retire mandatory I just turned 52 I have a small business servicing fire extinguishers I would love to be able to retire by age 55 from the fire department but have the luxury of retiring on my terms and be able to travel with my significant other any help will be greatly appreciated

  • Report this Comment On August 29, 2014, at 7:43 AM, echan383 wrote:

    For people in dangerous professions, such as those who serve in the Armed Forces, fire fighters, policemen, etc, life insurance (especially if subsidized by the employer) can be very useful, as the first anecdote in this article alludes to. For many young servicemen and women, especially those coming right out of high school and then get sent off to battle, they cannot afford to wait for an investment to mature, if they even have money to invest. So for some, life insurance is not only a smart choice, but perhaps even a necessity.

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