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Jan. 16, 2023

Life Insurance....what you need to know and how to plan for your future

Life Insurance....what you need to know and how to plan for your future

We are diving into all things life insurance today. I know this isn't a super fun topic to talk about but it is incredibly important to set yourself and your family up financially if something were to happen to you.

Topics covered include:
- SGLI and FSGLI, who gets it and coverage amounts
- transitioning from SGLI to VGLI and the rules around that
- private insurance and the difference between whole life and term life policies
- pros and cons for whole life vs term life
- the Survivor Benefits Program or SBP, who is it for, what does it pay and is it worth it?

We talk a lot of numbers and examples and I hope you find it helpful in navigating your insurance needs. 

As stated in the show, I am not a financial professional, this is my knowledge, experience and research. Please seek the counsel of a financial professional when determining your insurance and financial needs. 

Stay tuned for more money talk next week!

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[00:00:00] Hello, hello and welcome back to the show. So today we are going to talk about life insurance, which for military members is called sgl, L I. Sgl I stands for service members group life insurance, and it's what you get automatically while you're on active duty. And then we're also gonna touch on private insurance and the Survivor Benefits program or S B P for after retirement.

[00:00:26] So let's just preface this whole thing with the fact that I am not a financial professional. I am just sharing my knowledge, my experience and research. So please consult a professional for help with your financial plans. And I know that life insurance is not really the most fun topic to talk about, but it is incredibly important.

[00:00:49] And I am going to share a story at the end of a really good friend of mine. Went through a really traumatic experience and what that did to them financially. Her husband was active duty for 24 years and so there's, it, it really matters. It's really important. So this is the first. First topic that we're gonna cover in our financial series.

[00:01:10] We have a couple more episodes coming behind this one, but today is specifically on life insurance and the Survivor Benefit Program or S B P. Okay, so S G L I, we already said stands for the service members group Life insurance. I always like to know what stuff stands for, right? Cause we hear acronyms all the time, and it, for me, in my brain, for it to make sense to me, I say it and then I say, Acronym in my head at the same time, and it just kind of helps me solidify it for myself.

[00:01:39] But anyhow , so sgl I coverage is available in 50,000 increments up to a maximum of $400,000. And service members are automatically insured for the maximum coverage amount of $400,000 unless they decline coverage or elect a reduced amount. I did not, I meant to look at that. I did not look at how you can decline coverage.

[00:02:00] I don't know why you would decline. It's pretty cheap. So if you have sgl, l i coverage, you pay a monthly premium that's automatically taken outta your base pay. And the current basic Sgl l i premium rate is 6 cents per $1,000 of insurance company. So, And then this premium includes an additional $1 per month for traumatic injury protection coverage, or T S G L I.

[00:02:26] So for $400,000 of coverage, you pay $24 a month and it is mandatory for active duty. So that's a pretty reasonable amount for that. $24 for $400,000 is, is very, very, very reason. . All right, moving on. So sgl I coverage ends when you retire, and then when you retire, you'll need to apply for V G L I, which stands for Veterans Group Life Insurance within one year and 120 days of leaving the military.

[00:02:54] So that one was a little bit confusing for me because I thought it was 120 days, but I specifically went to multiple websites and it said, Specifically the Veterans group life insurance. It says one year and 120 days. So, you know, take out how you will. But if you sign up within 240 days of leaving the military, you won't need to prove that you're in good health, which is important because as you get older, and if you're looking at retiring, you probably are older, you might have some medical issues, insurance is gonna be harder to get.

[00:03:24] Life insurance is harder to get the older that you are and if you have any preexisting conditions. So again, if you want to convert that SGL I to V G L I within a 240 days, you don't have to do any kind of medical testing. . If you sign up after the 240 day period, then you'll need to submit evidence that you are in good health.

[00:03:44] That's usually a nurse coming to your house. They try to make it as easy as possible, and they usually draw blood and do an ekg to make sure that your heart is. All good. So it's important to understand that the payment from sgl I may be denied. I, I didn't look up what the reasons for being denied might be, but unlike other life insurance policies, this is important.

[00:04:07] Sgl, I will not deny payment based on misconduct. of the insured or in the case of suicide. So that's a big caveat because for most life insurance companies, if the person that is covered commits suicide, the policy is null and void. And that is not the case with S G L I. Okay. So then can you cash out sgl I.

[00:04:29] No, you cannot. Sgl I is coverage is a form of term life insurance, which means that it only provides a death benefit during that specific policy term. There is no cash value, and so when the coverage ends, there is nothing left. That's a difference between term and whole life insurance, which we are going to get into in just a little bit.

[00:04:49] So mill spouses are covered by F S G L I, which is family service member group life insurance. So FS G L I, coverage for spouses is pretty inexpensive, especially if you're younger, but it is not free. It is. So spouses below the age of 35 pay $4 and 50 cents a month for $100,000 coverage with premiums deducted from the members pay.

[00:05:13] Again, this is something. Automatically done unless you decline it, it's, you are automatically signed up for this when you are registered in deers as a spouse. So however, though, starting at the age of 35, the rates start to go up. So from 35 to 39, the spouse pays $5 and 30 cents a month for a hundred thousand dollars, and the rates rise every five years until the age of 60, when spouse coverage costs $45 per month for a hundred thousand dollars.

[00:05:40] One of the most significant drawbacks to F S G L I and also to S G L I is that you can only get specifically for F S G L I, you can only get up to a hundred thousand dollars of coverage. So the big question is how much life insurance do you need? And these are, this is the big question that you need to sit down with your spouse and really think about and talk about.

[00:06:04] We're gonna get into some numbers here in just a. . So if you're concerned about helping to provide for a family or pay for a house, a hundred thousand dollars is not gonna go very far. It might not be enough for your needs. According to the Guide to Financial Readiness for Military Families, These are the things that you wanna consider when you're trying to determine how much life insurance you need.

[00:06:27] You ideally would like, should have seven to 10 times your annual salary. Dave Ramsey, who we're gonna talk about a little bit more. He's a huge financial guru. In, we'll talk about him more in a minute. He recommends 10 to 12 times your annual salary. Also want to include in that number your mortgage balance and other.

[00:06:47] Future college costs and funeral costs. And according to the National Funeral Directors Association, the average cost of a funeral ranges from $6,971 to $7,848. That was as of 2021. . So this is really important information to think about and to talk about with your significant other when you consider those numbers and the fact that a lot of military spouses are unemployed or stay home with the kids.

[00:07:20] If something happens to your service member and the sole earner of your family, that leaves a significant income no longer coming. , and again, I'm gonna share a personal story here in a few minutes about that if your service member dies while still on active duty, the military service provides payment called a death gratuity in the amount of a hundred thousand dollars.

[00:07:43] That is also including those who die within 120 days of separation as a result of service connected injury or illness. So this is in addition to sgl. I, all right. So that's kind of what happens while you are in service. So thinking about life insurance for after you retire or discharge, there are two types of life insurance.

[00:08:05] There's whole life and term. Whole life is just like it sounds. It's for the entirety of your life. Term life insurance is for a specified amount of time. The most common are 20 and 30 year policies. Whole life is insurance is good for people who want lifelong. Premiums that don't change and a cash value component.

[00:08:27] But whole life insurance is much more like significantly more expensive than term life insurance. Term life plans are much more affordable than whole life insurance, and that's because the term life policy has no cash value unless you die during the course of the term. The main benefit of whole life insurance is number one, that it lasts your whole.

[00:08:50] And then number two is that you are quote unquote investing money with your premiums. Okay, so here we're gonna talk about, I mentioned previously Dave Ramsey, so I don't know if you're familiar with Dave Ramsey, but he's an eight time national bestselling author, a personal finance expert, and he hosts a show called the Ramsey Show that has like 23 million listeners every week.

[00:09:10] So he is. He's pretty big in the financial industry. He's also Christian, so there's a lot of churches that run his programs. He does, he has a, a big one that's the debt snowball where, how can you get outta debt. So he's, he's really cool. But anyways, He absolutely hates whole life insurance.

[00:09:29] And he offers a great story that I, I, I really like to understand the numbers and to have something like laid out for me that makes sense in, in my brain. And so I really appreciated this story that will help, that kind of helps illustrate. The difference with whole life and term. Okay, so let's say that we have a friend whose name is Greg and he's in his thirties and he wants to get $250,000 of life insurance for his family.

[00:09:55] So he meets with a whole life insurance agent who pitches a $260 per month policy that will include the insurance coverage and build up savings for retirement, which is what a cash value policy is supposed to do on the other. A term life agent tells Greg that he can get a 20 year term. So same thing.

[00:10:17] Oh, sorry. So a 20 year term with $250,000 of coverage, which is the same coverage as the whole life, but it's just for 20 years for an average of $13 per month. So that's a $247 difference compared to whole life. So you can see where that discrepancy starts to to come in. Okay. If Greg goes with the whole.

[00:10:37] Whole life cash value option. He will pay hefty monthly insurance premium, right? That $267 or $260 per month, , but it's because the part of his premium that isn't inuring him is going towards his cash value, quote unquote investment. Right? Well, you would think that that's what's happening, but there's a lot of fees and expenses associated with whole life insurance.

[00:11:01] So in truth, the additional $247 per month disappears into commissions and expenses for the first three. And then after that, the cash value portion will offer a horrifically low rate of return for his investment, like one to 3%, which is pretty atrocious. Okay, but here's the worst part. . So let's say that Greg gets this $250,000 whole life policy at 30 years old.

[00:11:28] He pays $260 per month with $15 going to the insurance and the rest of that going into a savings account with a 2% return rate. So after 40 years of paying way too much for his insurance, Greg is 70, he has $250,000 insurance, and roughly $180,000 in cash. and then Greg dies. So how much does the insurance company pay out to his wife and kids?

[00:11:57] $250,000. But wait a second, what happened to the $180,000 of Greg's hard-earned savings? The insurance company keeps it only Greg is entitled to the money in that savings account. So to keep it out of the insurance company's pockets, he would have needed to withdraw and spend it while he was still alive.

[00:12:19] So there's a little game of roulette. When do you ha? You wanna leave it in there? Let it build at 2%, which is really sad, but you don't wanna pull it out too early. But if something happens to you and you don't pull it, The insurance company gets to keep that savings. Okay, but what if Greg instead chose the $13 20 year term life policy and decided to invest the $247?

[00:12:46] So then, so now he's at the same level as the other policy, which was $260. So he took that $247 per month that he'll save by not choosing the whole life plan. If he invested in a good growth stock mutual fund within 11%, it is more. 10 is what usually here, 10% average rate of return, annual rate of return.

[00:13:08] He would have about $214,000 in investments by the time his 20 year term life and policy expires. Okay. and then more than 2.1 million at the age of 70. So that's a lot of bang for your buck if you take that money instead of giving it to whole life where you get, you know, that investment, that's a 2% rate of return.

[00:13:35] And you can be disciplined, cuz that's the tricky part. And invest that 247 instead in a growth stock Mutual. You would have 2.1 million with age of 70. No one's taken that money, that's yours. It doesn't, it's not being held by anybody else. Right. Okay. So that's a really good illustration of the differences between the two with actual numbers.

[00:13:57] All right, so the ideal time to buy life insurance is when you're young and you have a clean bill of health, especially because life insurance companies look at the risk of a person. purchasing the policy when they're underwriting it. Okay. , if you have any preexisting health conditions, they're, especially if you have anything with your heart, you're gonna have a really hard time getting a policy.

[00:14:17] And if you do get a policy, it's gonna be really expensive. Okay. So I know a, again, this is not a super fun topic, but the last thing that you want to worry about, if something happens to your. Is money. So this is important conversations that need to be had and just again, under having just a, like a, a, a bird's eye level of understanding the difference between all of these things.

[00:14:41] Okay, so next let's talk about we're gonna switch gears, just a hair and talk about the survivor Benefit plan or SB. . Okay, so S B P provides up to 55% of a service member's retired pay to an eligible beneficiary upon death of the member. After the service member passes away the SB P annuity, which is that money is paid out monthly to the surviving spouse or to the child or children of the member.

[00:15:13] So, . So essentially what you're doing is if your service member retires, you have the option to enroll in sbp. If you enroll in sbp, they take out a monthly premium for you to have. The to essentially guarantee that you'll keep the pay. Because guess what happens when your service member passes away and you do not have sbp?

[00:15:34] Their pay is turned off immediately. That's it. It's gone. You get nothing. Okay, so we're gonna get into that a little bit more. Hang, hang tight. this is another thing that's really important to remember and that can be really eye-opening and. , scary when you are thinking about retirement, 

[00:15:54] It's important to remember that when you retire, you get a percentage of your base pay. Okay. Not B a h or b a s. So do the math and look at what percentage you are eligible for based on how many years of service you have in retirement. You need to serve 20 years or more to qualify for the lifetime monthly annuity.

[00:16:15] And then your retirement benefit is determined by your years of service. It's calculated at two and a 5% times your highest. 36 months of basic pay. Most retirees under the high 36 plan, or high three, which is essentially your ba, your base pay over the last three years is averaged and you will receive 50 mo.

[00:16:36] Okay? So if you do 20 years, you receive 50% of your base pay at 20 years. Okay? Which, let me, let me throw some numbers at you. Okay. So here's, so here are some amounts as an e. retired at 20 years. , your monthly pay, would be $2,616 annually, $31,394. So again, half of your base pay is what you get.

[00:17:02] So that number might be very surprising to a lot of people. Okay. As an oh five, if we're in the officer community monthly, you're gonna, you're looking at $5,040 or 60,486 annually. A military retiree, you pay a premium for that SBP coverage upon retiring, which is essentially allowing your pay to continue even after the service member passes away.

[00:17:26] The cost of SBP is the same for everyone. It's six and a half percent of the pension, and it's direct, I'm sorry, it's deducted automatically from their retirement pay. The SBP beneficiary receives payment only upon the death of the insured. . Okay, so let's get into some more numbers here so that you can have the information and make an informed decision.

[00:17:50] Okay? So if your base pay is $2,500 retired, you will pay $162 and 50 cents monthly for sbp, and then the SB P benefit. At 55% of the base amount would be 1375. So if you retire, your base pay is your 50% of your base pay is 2,500. You're paying $162 and 50 cents per month to have that SBP benefit. And then if something happens to the service member and they die, And you are enrolled in S B P, the surviving spouse would then get 1375.

[00:18:31] You only get 55% of your base pay retired, which is 50% of your base pay when you leave. Did you see, did you see the math year? Like the number just gets smaller and smaller and smaller and smaller? If you survive your service member and opt to pay the monthly cost for sbp, you no longer pay the premium when you start to collect it.

[00:18:50] And, , it's important to do the math here. The more money that you make retired, the higher your S B P premium is. Remember, it's six and a half percent of your pension. The higher your pension is, the higher that percentage is, right? Or the higher that amount is, it's 6.5% across the board. But again, depending on how much money you have, so for example, as an oh five, you would be paying $327 per month for SBP benefit.

[00:19:18] This is where really doing your homework and starting early can really benefit you because the earlier that you get life insurance policy, usually the cheaper it is. So you could get a million dollar life insurance policy for 20 years at the age of 40 for around $130 a month, depending on any preexisting medical conditions.

[00:19:39] That's a lot of money. , we're gonna do some more math here in a minute. You can kind of, again, see the, the pluses and minuses so you can start just seeing where the discrepancy in the benefit is, is here. Right? So with SBP versus life insurance, you're paying much more with S B P for less in most cases.

[00:19:57] Again, you know, the earlier that you can get a significant life insurance policy, the cheaper the policy will be. Another thing here that I just wanted to, to toss in real quick is, How long of a term do you need to have for your policy? It is recommended that you have a life insurance policy that would see you through 60 years of age, because by the time you're 60, usually your kids are already gone and out on their own, and it's just you and your spouse, or it's just you.

[00:20:26] And you don't have nearly the expenses as a young family per se. You would ideally conservatively , ensure yourself to the age of 60. So when you're looking at what term policy do you want to have, again, going back to those numbers that we were just talking about, the $130 a month for a life insurance policy premium is much cheaper than $327 per month for svp.

[00:20:51] And then you probably get more money depending on the age of death. Then another thing to consider as well is that S B P is taxable, so that money that you're gonna get is also gonna be taxed if you've received social security and or civil service. Fears, F e R s annuity will not interfere with S B P unless the service member waived a portion of his retired pay for a combined civil service annuity.

[00:21:15] So that's a very specific circumstance, but just wanted to throw that out there. Just to share a personal story with you. . I have a dear friend whose husband retired from the Navy after 24 years of active duty, and they moved to a new town and he started school to transition back into the civilian workforce.

[00:21:33] And then 18 months into his retirement, he was killed by a drunk driver while on the way home from. Closing , signing the paperwork for their new house in their new town. They had an eight-year-old daughter, and my friend had been a stay-at-home mom up to that point, so their only source of income was his military retirement pay.

[00:21:57] When he retired, they declined rights of survivorship when he was discharged, as soon as his death was reported, his military pay was turned off. They now have zero income. Zero. Nothing. The only source of income that they had was his term insurance policy, life insurance policy, which was $300,000. So you have , you have your spouse who has financially supported your family for up to that point of their death, right?

[00:22:35] Solely supported your family. And their pay is just. and if you're a stay-at-home parent or as most a lot of military spouses are, and you're not working outside the home, you have one source of income that gets turned off right away. That is really scary. Really scary. In addition to the stress, the additional stress of finances on top of losing your spouse, , potentially the father or mother of your children is really, really, really hard.

[00:23:10] It is horrific to go through that experience anyways, and then when you put the financial hardship on top of that, it is just absolutely horrifying. It is absolutely horrifying. So, Take the time, do the homework, see what your needs would be if something tragic were to happen, and put your plan in place and then you can just forget about it.

[00:23:34] You just have to sit down and you have to look at. What is your service member bringing in financially? What financial obligations do you have? Right? Your debt, your home, and then think about things in the future. College. If you've got kids, you gotta put through college like you're planning for. Worst case scenario.

[00:23:54] You need to know what that number is so that if something were to heaven forbid happened to your service. You and your kids will be taken care of. You do not need to worry about money. So that's, you gotta sit down and you gotta do some math, but the financial freedom of knowing that if something were to happen to your spouse and that you and your family would be taken care of is, is truly priceless to have that peace of mind and.

[00:24:25] the earlier you do this, the earlier you put this in place, the cheaper it's gonna be. So my recommend, again, I am not a financial pro professional, but just looking at the math. , getting a term life insurance policy is way better financially than s b P. It is way better financially. You just have to do it ahead of time and you, you can't, you, you just can't leave it until the last minute.

[00:24:49] The earlier that you can look at this, the better. I know, again, I know it's not a super fun topic to talk about, but it is incredibly important. It is incredibly important. Stay tuned for next week's episode. We're gonna dive into all things finances, including how to find a financial advisor.

[00:25:05] What type of investment is right for you? How can you thrive in any market? We're gonna keep it really, I'm not getting, I am, again, I'm not a financial expert. I'm gonna be talking about next week. The book is called Unshakable by Tony Robbins. You need to get that book. Everybody needs to read that book because it is, it lays out finances in such a way that's very easy to understand, and so you have a working knowledge of your money and your finances and what you can do and how you can do it.

[00:25:35] So that's next week. Stay tuned for that. Until next time.