A reader asks about the post how much life insurance is necessary:

I just thought of a follow-up question to this article because it really got me thinking about getting rid of our SGLI coverage. What kind of benefits will a spouse or family receive if an active duty member dies?

I found this report about survivor benefits: It states that the survivors will receive a $100,000 death gratuity payable immediately. Also, it says that spouses are eligible to receive a pension under the Survivor’s Benefit Plan. To receive SBP benefits, the death has to be in the line of duty. But from what I can tell, the line of duty definition is pretty loose. The death of an active duty member is presumed to be in the line of duty unless the person was AWOL or doing something dumb.

If all of these benefits are available, why carry a bunch of extra insurance? My spouse and I (dual military) have kept the $400,000 max SGLI coverage. I’ve always rationalized paying it because the premiums are reimbursed whenever we are deployed, so “lucky” for us, we usually only pay premiums for half the year. Plus our job is a little bit more dangerous than your average office work. But I think between the death gratuity and SBP, we’d each be more than set. Unless I am missing something?

Great question, and one that spans a generation of policy issues with military survivor benefits. I should point out that this reader has asked a number of outstanding thought-provoking personal-finance questions over the last three years, and they’re close to financial independence. They’ve already won the game in the third quarter, and now they’re just reviewing their playbook to make sure that they don’t blow their lead.

Click the image to read.

Survivor’s benefits have changed significantly over the last decade. For example, up through the early 2000s a “battlefield retirement” might have been given to seriously wounded personnel. The logic was that their survivor benefits were higher if they were medically retired before they died, rather than their SGLI and other payments from dying on active duty.

Today, the deceased servicemember’s Survivor Benefits Plan is a little different from the military retiree SBP. The deceased servicemember’s plan is based on the number of years of service and it assumes a retirement at 100% disability. Here’s the applicable paragraph from the DoD Survivor’s Guide (page 13):

“Surviving spouses and/or children of service members who die in the line of duty while on active duty may be entitled to Survivor Benefit Plan (SBP) payments. Your casualty assistance officer will schedule a meeting with a retirement services officer who is an experienced counselor and can provide information about survivor benefits and help you with the applications. SBP payments are equal to 55 percent of what a member’s retirement pay would have been had he or she been retired at 100 percent disability.”

The Chapter 61 disability retirement calculation is similar to a High-Three retirement:

Pension payment = (High-Three pay base) x (disability percentage).

However, for a disability retirement, federal law limits the disability percentage to 75%. In this case the survivor benefit would be

Payment = (High-Three pay base) x (75%) x (55%) = 41.25% of the High-Three pay base.

For purposes of this post’s estimates, let’s call it roughly 40% of base pay.

You’re right about the line-of-duty determinations. Even if the member was doing something risky (perhaps related to judgment or fatigue or environmental conditions) there’s still the benefit of the doubt. The Department of Defense wants to avoid the perception of punishing the families for a servicemember’s mistake.

But let’s look at the amount of the SBP. The survivors of an E-6 with 10 years of service earning $3331.50/month base pay would receive roughly $1325/month or under $16K/year. If that income came from a $400K SGLI payment, $16K/year would be a 4% annual yield. For a more junior servicemember the SBP amount could be even smaller (and still subject to income tax) when compared to the income that could be generated by a $400K SGLI settlement. Of course, the survivors are also eligible for Dependent’s Indemnity Compensation, a transition housing allowance, limited medical benefits, commissary and exchange access, and other compensation.

For a more detailed estimate of the benefits paid when a servicemember dies on active duty, review Tables 14 and 15 on pages 579-580 of the Quadrennial Review of Military Compensation report. From E-6 through O-5, the amount of compensation (both in cash payments and the present value of income replacement) ranges from $891,631 to $1,104,677. SGLI makes up over a third to nearly half of those amounts.

If the small SBP payment (and other benefits) would cover your survivor expenses then yes, you could cancel SGLI. The SGLI premiums (now 7 cents per $1000, plus the $1/month for TSGLI) are as much as $29 per month per servicemember. However, there’s still the emotional sleep-at-night comfort that comes from having another $400K of life insurance at a very affordable rate of less than $350/year per person. If your premiums are reimbursed for deployments then you’re only saving ~$175/year per person. People have to decide whether saving that relatively small annual amount is worth self-insuring for this risk.

Considering the grief and disruption that’s caused by a servicemember’s death, I think it’s worth keeping the SGLI until military service is over. Even then it may be worth keeping life insurance (VGLI or some other term policy) until the insured is completely finished earning a paycheck. Finally, military retirees may still want to use some amount of retiree SBP or term insurance to benefit a surviving spouse (or a kid’s college fund) until you have the financial independence to self-insure for those as well.

There’s no simple answer on how much insurance we should carry, let alone how much we should pay for it. If the annual cost of insurance is close to a family’s monthly entertainment budget, then, in my opinion, it’s worth keeping the insurance.

You and I may both have the “right” answer, and this could be a perpetual debate (like whether to pay off a mortgage early). My spouse and I are partly on your side of the question because we’ve declined SBP coverage of our military pensions. We decided that we have more income and assets than we need (for the rest of our lives), and we’d rather spend the 6.5% extra income on each other now instead of on our survivor lifestyles. We’ve already launched our only child from the nest, we’re self-insured for disability and long-term care, and nobody else in our families needs our financial support.

However, I’ll leave you with two cautionary sea stories.

Last fall a Navy helicopter pilot was killed during a shipboard landing. It’s particularly sad that the accident happened when his aircraft was already on the deck and no longer under his control, and his death may have been avoidable. To make the tragedy even harder on his surviving family, he had turned down SGLI coverage five separate times. He had not discussed it with his spouse because they had split their decision-making responsibilities, and he handled the SGLI decision on his own. SGLI policy requires that the life insurance company notify the spouse of this decision, but that backup didn’t happen either. His family was blindsided by the tragedy and then further devastated by learning that they’d been uninsured the entire time.

Financially, he felt that he’d made the correct decision for his situation. In retrospect, his spouse really wishes that they had the insurance money for child support and college funds. Emotionally, his family would have been much better off if they had spent the $29/month.

Last sea story: my daughter is a brand-new servicemember with no spouse or kids. Nobody but her is depending on her income, and she has no financial reason to buy SGLI coverage for anyone– certainly not for her parents. However, a military retiree and independent CFP (whose advice I trust!) has pointed out that right now she’s insurable with no medical exams or underwriting. By signing up for SGLI today (before deploying next month) she’ll have the coverage as long as she’s on active duty, and she’ll automatically be eligible for VGLI when she leaves the service. In other words, she’s paying $29/month for peace of mind and for not having to constantly re-assess yet another financial decision. She sleeps better at night, and I do too.

Related articles:
How Much Life Insurance Do You Need?
Reader Question On Veterans Group Life Insurance
Lessons learned on insurance
More lessons learned on insurance
Insurance for a young adult
Military insurance: SGLI, VGLI, SBP, and other benefits
Insuring A Soldier: Life Insurance For Military Members
USAA: Eight Life Insurance Myths