When it comes to life insurance for military families and veterans life insurance advice, there has always been a status quo “right” way to do things. Falls right in line with other traditional financial advice.
First, you get a job. Then you save diligently for retirement in a 401(k), IRA/Roth IRA, or Thrift Savings Plan (TSP). Buy some term insurance and invest the rest. At some point after the age of 59 ½ , you stop working and start to draw on those retirement savings.
Their intent is to provide a stable financial story for you for the rest of your life. But too often its just that, a story.
Options for Veterans
Status quo life insurance for military and veterans is very similar except we have a few financial planning vehicles that the general public doesn’t have:
- Created in 1972, the Survivor Benefit Plan (SBP) is a form of life insurance that operates as an annuity. Instead of paying out a lump sum to the beneficiary like most life insurance for veterans policies, it pays out a portion (55%) of the member’s retirement pay each month. This lasts until the survivor either passes away or is no longer eligible to receive the payments. Its design is to provide a basic level of support in the event a retired veteran predeceases their spouse. The SBP costs the same for everyone. It is 6.5% of their pension, deducted automatically from their pension check. It is payable only upon the death of the insured veteran.
- Servicemembers’ Group Life Insurance (SGLI) is the government-sponsored life insurance provided for military personnel during the period of active duty service. The cost of SGLI is very low. It is $300/month for everyone, and there is no qualification for coverage.
- Veterans Group Life Insurance (VGLI) is administered by the Veterans Administration. It replaces SGLI when the service member retires from the military. It requires no qualification if coverage is accepted within 240 days of service.
All of these plans and policies have their place. For certain individuals in certain circumstances, they can be good choices or even life-savers. But they all have significant drawbacks, so let’s dig into what those are.
The Problems with the Survivor Benefit Plan
Whether or not to take the SBP is a one-time decision that must be made at retirement, or within a year of a change in life circumstances, like remarriage or parenthood.
If the veteran has a spouse at retirement, then it isn’t even a choice.
The spouse and children are automatically enrolled at full coverage (6.5% of the pension) unless the spouse elects a lower amount or declines coverage. The decision as to whether or not to take the SBP rests SOLELY with the spouse.
They must opt out with a notarized signature.
There is no requirement to qualify during the underwriting process. There is also no requirement to set up premium payments, as the SBP deducts directly from the veteran’s pension.
Sounds pretty good, right?
Again, there are circumstances in which the SBP is a lifesaver. But you can learn more about avoiding the costs of SBP here.
But for Many Others, the Devil is in the Details:
But what does this mean for Veterans Life Insurance?
In the long run, the amount of money the beneficiary receives from the SBP annuity is usually considerably less than what the monthly premium amounts could have generated as investments and insurance in the private marketplace.
The ONLY way that the SBP makes good financial sense with regards to ROI is if a service member dies within a few years of retiring.
Inflation causes adjustments to 6.5% of his/her pension. This deducts over a couple of years, in return for 55% of his/her pension. Again this adjusts for inflation. That amount pays out to the spouse for the rest of the spouse’s life.
It can be a pretty good deal.
That is as long as the spouse with the insurance dies within a few years of retiring from the military.
The Problem with VGLI
VGLI is administered by the Veterans Administration, and there are three main problems with it:
1) As already mentioned, there is no qualification required if coverage is accepted within 240 days of service. This is a good option for the service member with a life-threatening disability who is thus unable to qualify for privatized life insurance. But it’s not necessarily the best option for a veteran who is still young and in good health, who could likely qualify for a higher death benefit at a lower rate in the private marketplace.
2) Like SGLI, VGLI is the same fixed cost for everybody. VGLI is more expensive than SGLI from the beginning. But many of our veterans without life-threatening disabilities who are paying into this program are not fully aware that VGLI gets even more expensive every five years. You can see just how much more expensive by referring to the cost table provided by the government. What this means is that the older the insured gets, and the more likely they are to die, the more astronomical ($1,840 a month for those 75 and over) the costs become. It’s unrealistic to expect that any veteran who's living off their pension will be able to keep up with these costs.
3) The death benefit for VGLI is the same for everybody, too: $400,000. That seems like a lot of money, but when you consider that the insured is likely to be earning a salary of something around $100,000 a year by the time they die, it becomes clear that $400,000 isn’t going to take the widowed spouse and any children very far. Furthermore, if the insured is forced to stop coverage because they are no longer able to afford the premiums, then that $400,000 death benefit is not going to be around at all when the service member or veteran wants to leave a legacy, even if they have been paying into the program for 20+ years, because there is no equity in VGLI.
As a Veteran, you shouldn't be limiting yourself to the Survivor Benefit Plan and VA disability, or VGLI. There are other options, though they aren't without their own problems, too.
Learn how to calculate the costs of VGLI here.
The Problem with 401(k), IRA/Roth IRA, and the TSP
While retirement account aren't a form of military life insurance. They are often assumed to be apart of "self-insurance" much later in life. However, this is a majorly flawed assumption as it is clearly apparent no one has ANY idea what the future of the stock market hold or when the next correction will happen. Here's some background before we discuss the other issue around life insurance for military retirees and veterans.
At some point, everyone is advised to either participate in their company’s 401(k) or to set up an IRA. You elect to have contributions from your taxable income deducted from your paycheck, so you pay less in taxes while you work. The money grows in a securities-based account, and you don’t have to pay taxes on any of that growth until you decide to take distributions. Under current law, you are not even allowed to start taking distributions until age 59 ½ without incurring a 10% tax penalty. The prevailing idea is that because we will be earning less income when we retire, our marginal tax rates will be much lower, so paying taxes on the growth at that point won’t be so much of a sting.
Since all the funds in 401(k) and IRA accounts are subject to ordinary income taxation, we have an incentive to keep the money in those accounts and not spend it unless we need to, lest our marginal tax brackets increase based on whatever we distribute. Once you reach the age of 70 ½, however, leaving all of your money in these accounts is no longer an option. At that point, you are required to take what are known as Required Minimum Distributions or (RMDs). In order to determine the size of a person’s RMDs for any given year, everyone’s favorite 3-letter-federal agency, the IRS, puts out an RMD worksheet . This is probably all familiar to you, and everybody does it, and you probably believe, because you’ve been told so, that everyone should. So what’s the problem?
There are two wildcards with regards to these retirement plans: market returns and marginal income tax rates.
The Problem with Term Life Insurance for Military
Term life insurance in the private market place does offer some advantages over SGLI and VGLI. Because you have to qualify, the younger you are and the better health you are in, the lower your premium rates and the higher your death benefit are likely to be. However, there is no equity build-up in term life insurance for military, and like VGLI, the rates get higher the older you get. And unlike VGLI, which will go on for as long as you pay for it, term coverage ends when the term is up. In your sixties or seventies, in the event you are even able to find another 20-year plan, the costs will be astronomical, and you may still very well outlive the term, leaving no protection or legacy for your loved ones.
The Problem with the “Term and Invest the Rest” Solution
Many financial planners and experts recommend using a 30-year term policy from a military-friendly company that can offer some cost savings. The idea, and this follows much of the Dave Ramsey philosophy, is to get term coverage for an amount to cover family expenses in the event of an untimely death, all the while saving and investing enough money successfully in the stock market so that your spouse won’t need any military life insurance, and you’ll be able to stop paying for it after those 30 years. The problem with this solution is that it makes several erroneous assumptions. No one advising that people should “buy term, invest the rest,” explains in what vehicles one should “invest,” nor in what amounts, nor how to weather a bear market. The “invest the rest” component is closer to wishful thinking than to an actual solution, due to the two wildcards we discussed above.
Regardless of one’s ability to successfully “invest the rest” over 30 years despite the alarming number of variables out of an individual’s control, this is money meant for living, not leaving a legacy, and there will be even more taxes paid by the heirs when the money passes to them.
The Problem with Whole Life Insurance for Military with Paid-Up Additions
In the 1990s, some financial firms catering to military and veterans began selling whole life insurance as a way to privatize the protection of a military pension, offering a permanent solution to estate planning, something that a 30-year term policy could not do. These were typically offered in conjunction with retirement plans. At a high level, these plans are very attractive. They both provide a death benefit for the insured’s loved ones and allow them to leave a permanent legacy. At some point in retirement, the policy is paid up, and the insured no longer has to make payments.
They also has the option of continuing to increase their coverage every few years with something called paid-up additions. As long as the insured pays a little more, they are guaranteed to get some more insurance. Over time, taking this approach during a military career was designed to leave you with the perfect amount of insurance to cover the pension so that the SBP would not be needed. While whole life insurance can offer both equity and permanent coverage, which term policies cannot do, these policies have some major flaws:
There Are Alternatives to the Status Quo of Veterans Life Insurance
Here at US VetWealth, we have designed an alternative to the status quo military financial planning vehicles. Especially when it comes to life insurance for Military and Veterans. Our solution offers both a lot more equity growth (as interest is credited based on the S&P 500 performance, not the federal bond rate) and a lot more liquidity that you can access while you're still alive. It offers a safeguard against negative market returns, and allows its owner to both comfortably fund their retirement and still be able to leave a legacy behind them when they die. We call it your Survivor Liberty Plan.
This completely new approach to privatizing the SBP or pension protection has become available in recent years; however, the majority of financial experts and professionals are still very unaware of this solution and the game-changing benefits it brings to solving the SBP problem. Modern life insurance can provide the death benefit protection of a term policy while also producing an annuity stream much like the SBP; to be more accurate, it can provide an annuity stream much like the pension, because you can use it while the veterans is still alive! Further, after 30 years, the costs are significantly lower than an SBP, and the ROI is significantly higher than on a term insurance or whole life policy. It also costs less than the fees involved in typical 401k, mutual funds, or other retirement plans that come along with money managers all taking a cut of the investment, regardless of the plan’s performance.
Veterans no longer have to rely on the Survivor Benefit Plan and VA disability, or VGLI, or any of the other outdated status quo financial planning for military retirement vehicles.
If this interests you, then schedule a call with one of our advisors to learn more about the Survivor Liberty Plan.
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