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 military.com. Follow June on Twitter: @AskJune_usaa.
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