Life insurance is one of the most important components of your personal financial plan. Unfortunately, life insurance is poorly understood, and breadwinners' mistakes invariably cause great financial hardship for their survivors. The primary purpose of life insurance is to protect your survivors from the adverse financial consequences of your premature death.
If servicemembers have no survivors, then it's unnecessary to buy life insurance beyond the amount needed to pay for any outstanding debts or settle the estate.
If servicemembers are married or have young children, then it's prudent to have life insurance to insulate the family from financial disaster. Servicemembers who want to marry or have children soon should explore life insurance options.
How Much Life Insurance Do Servicemembers Need?
The general idea in determining life insurance needs is the estimate the family's actual financial situation in the event of the policyholder's death. Life insurance is not a measure of devotion to loved ones or a monument to self-importance. It is insurance in case of premature death, and it should be used to protect dependents against undue financial hardship. If a servicemember is not alive to provide for his or her family, insurance coverage should be sufficient to enable them to live comfortably. Servicemembers should determine the expenses survivors would incur in the years following their death and the income they will receive. By matching income with expenses, policyholders can easily see any short-falls (there may be none) that are best covered by life insurance.
Plan for a basic monthly income for the family, plus additional needs such as education for the children, special medical care for predictable problems, and a reserve for emergencies. As life changes, some of the needs disappear. For example, if the policyholder's children are grown and through college, there is no need to leave money for the children's education. Thus servicemembers need to reevaluate insurance needs periodically to make sure the survivors' situation hasn't changed. In any case, there is never a requirement to make the policyholder's family wealthy upon his or her death; buy only the coverage for identifiable needs.
The first step is to estimate the monthly expenses the policyholder believes his survivors will face. If you don't know where to start in estimating these expenses, a good rule of thumb is two-thirds of your present monthly income for those years when children will be at home, and one-half after they have left.
What Type of Policy Should You Buy?
Currently, an active duty servicemember may elect to take up to $250,000 of coverage for $.65 per month per $10,000 of coverage, regardless of age. This is very inexpensive insurance for older officers and noncommissioned officers. In effect, the large numbers of young servicemembers make possible low premiums for the older servicemembers. For this reason, and because it is convertible after servicemembers leave the service, SGLI should probably be the basic building block of a military family's insurance program. However, military credit unions may offer a better policy at less cost than SGLI.
There are three main types of life insurance:
- Term - Lasts for a specific period; has no savings component. Term life offers the lowest initial premium expense. Over time, however, term insurance premiums can increase significantly. In the long run the cost may even surpass the cost of permanent life insurance.
- Permanent - Premiums are paid until your death but also build savings. This type of life insurance offers guaranteed premiums and guaranteed cash values. Some types offer cash value growth driven by the equity markets. While premiums are higher than you initially would pay for the comparable amount of term insurance, over time the permanent life insurance cost may be lower than term insurance.
- Variable - Has a flexible structure designed to allow greater return on the savings portion of the policy.
Within these major categories, there are many variations that will allow you to meet your life insurance needs.
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