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.
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.
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Hi Doug, We’ve recently been reassessing our life insurance needs as well. I remember that story of the downed helicopter pilot…so tragic in so many ways! We have plenty of insurance on both my husband (service member) and myself. The last thing I want to worry about in a death scenario is whether or not my financial estimates are correct. It doesn’t cost us that much, so I feel better about buying plenty of it for both. Life insurance is just something I don’t ever want to skimp on! I’ll reassess upon financial independence, which is definitely a ways out for me.
Thanks for your comment, Carly. Life insurance is a highly individual decision, but everyone has to feel comfortable with the risk.
Thanks for answering my questions Nords! I agree that it seems worth keeping SGLI until we are out of the military. If one of us were to die, we wouldn’t necessarily need the money, but the premiums seem worth the peace of mind. Another aspect of the debate that weighs on my mind is that our jobs involve a higher degree of mortality risk than most civilian jobs. We both fly and deploy frequently and while I wouldn’t say that I fear for my life or anything, it’s certainly riskier than sitting behind a desk stateside.
Our financial independence journey is starting to get really interesting and we are beginning to see the fruits of our hard work and savings! My enlistment is up in 202 days. I am waiting to see if we can get assignment orders to Monterey CA but if not I’m saying goodbye to active duty. I will most likely join the Air Force Reserves – it’s almost too good of a deal to pass up because I will qualify for $12,000 per year in language pay in addition to all of the Reserve entitlements. I plan on doing taxes during tax season too and then taking it easy the rest of the year. I’ve already gotten a lot of “but what are you going to do all day?!” comments about what I will do the rest of the time but I have my Get a Life tree all ready :) This blog has been a huge inspiration and has given me a lot of confidence that it’s possible!
You’re welcome, Brandi; you asked a great question!
Your AF Reserve plan sounds good, especially with $12K/year language pay! Another rockstar FinCon blogger entrepreneur (and ANG servicemember) recommends it too– he went cold-turkey civilian after the AF and found out that he missed the camaraderie (and the benefits). ANG was the answer.
Absolutely take Monterey if you can get it. Best duty station ever, and lots more fun when you’re not “just” a student.
When I retired 7 years ago i did an act most, if not all consider insane. I opted out of the SBP program. I could never square the actuarial bet, if not the numbers, to the logic of giving away 6.5% of retired pay for at best 55% of return on capital. And I would also be dead, and 30 year “paid up” whatever that means. I know how short sighted that sounds to all who have had the SBP drummed into our heads since boot camp. Or I am a terrible husband.
What I did that year was to take out a 20 year level term from USAA that more or less covers the payout that I would have gotten from SBP to age about 85 at 55% base. Now if I was in poor health, or of limited employability means, or if my spouse had little or no other work/pension/health care option then maybe I would have done such, but again I could not see math or logic. So what say others?
Good comment, Peter.
For the vast majority of military retirees, however, SBP provides peace of mind at an unbeatable price. Many military spouses have given up an entire career’s worth of earnings for the sake of their servicemember’s military career, and SBP is a good way to compensate for their retirement longevity risk. Over half of the premium is subsidized by the federal government, and as usual the inflation factor is more significant than the payout.
I’d love to see level term policies with the same features, but I suspect that not even USAA could replicate SBP’s cost-of-living adjustment at the same premium.
Does the Military retired need SBP.
I think that’s a highly subjective situation. Apart from the DOD stated talk about SBP the core of the problem begins with semantics. A Benefit implies a good or service offered either at no-cost or one greatly subsided relative to potential value derived. The SBP for the military retired is not a benefit, Tricare is an benefit, SBP is an insurance policy . A rather pricy one, relative to income and also comes with a very poor risk-pool in both health and other factors. Now granted the most healthy person can get hit by a bus tomorrow or develop cancer in 20 years. But does SPB make up or mitigate lack or financial planning or post military career and investment options.
On my 2014 base if I paid into the SBP program this year in 2014 that bill would be $3900.00 yearly OK. Over a 30 year Paid up option that number will be about 120K, give or take. A bargain, a good deal, maybe. But certainly not for all and all situations. I think any insurance contract that asks for $1 of premium for about $8.50 a best coverage seems to be a bit off in terms of who makes money at the end. Again, I think one can purchase coverage for a number of commercial agencies that offer far better terms. It’s your money at the end.