Most of us don’t have enough life insurance. We should fix that before topping off retirement savings.
My daughter is allergic to peanuts. Like many Gen-Xers, I don’t think I met a single person with a food allergy growing up, but when my own kids came along, it seemed all too common to hear that our friends had kids with food allergies too. Unsurprisingly, I’ve started to notice allergies more since a lethal one became part of our family. But the allergy I encounter most these days is to life insurance. We love to fund our TSP and Roth IRAs, but ask us to fund sufficient life insurance? Cue the hives and itching!
Why is the Military Allergic to Life Insurance?
I mainly serve military and veteran families, and most show up with too little life insurance. I have a few thoughts on why.
1. We already get SGLI/FSGLI (Servicemembers Group Life Insurance and Family Servicemember Group Life Insurance) on the cheap. The $500K of SGLI seems like a lot, but for officer families with kids and aspirations for a home, a mostly-stay-at-home parent (often mom), and education for the kiddos? It’s simply not enough.
2. Cost. We may not know what coverage costs, but we watch every dollar, and we know there aren’t spare dollars in the month for something that doesn’t have immediate value.
3. Horror Stories. We’ve heard about comrades who got swindled by an insurance salesman masquerading as a financial advisor (or relative/friend) and now pay hundreds or thousands every month while wearing the handcuffs of punishing surrender charges.
4. Ghoulish. To wake up and pledge our lives to defend democracy and the rule of law every day requires that we know death is an ever-present possibility. We compartmentalize that and avoid thinking about it. Life is hard enough without dwelling on death.
5. Math. If we do any math about our life insurance needs, it’s often wrong-math. We leave out inflation and skip the variables that skew our numbers in the wrong direction.
Let’s take a look at each of these underlying causes and see if we can’t recalibrate our immune systems a bit.
SGLI is NOT Enough
A retired O-5 with a 90% VA rating wakes up with about $100K of annual income. A post-military job likely pays about another $200K. Active Duty income was probably closer to $150K-$175K, yet lifestyle needs almost always shift towards that new $300K standard of living. Common rules of thumb about life insurance needs quote 8x to 16x annual income.
Thus, nearing the end of active duty, said O-5 could need somewhere between $1.2M and $2.4M, and his retired self could be looking at $2.4M to $4.8M. The latter is probably high, but maybe not.
Life insurance rules of thumb are just that, but let’s consider some realities. Assume a family with two kids and a stay-at-home parent who hasn’t worked in 6-9 years due to raising the kids while their servicemember wins bread.
If we think about what we need life insurance to do for us, it’s usually the following:
1. Pay for a house. If we die, we probably want our family to always have a home and not have to worry about losing it. Home prices have exploded since COVID. This is probably $500K to $1M or more, depending on the locale.
2. Pay for education. If we want our kids to attend college, we may need life insurance to foot the bill. If we die on active duty, the Fry Scholarship essentially provides the Post-9/11 GI Bill to our whole family, but if we die after active duty, the best case is usually that our GI Bill covers one kiddo. Public universities average $30K a year, and Private school bills are $65K+. Let’s call this $120K to $400K.
3. Living expenses. It may not be practical for our stay-at-home spouse to never work again, but s/he almost certainly needs time to grieve, adapt, and retool for the workforce. A good rule of thumb is that we need living expenses until the last kiddo is at least in full-time school, if not driving. If we were living on $150K a year, and our youngest is, say, 6, this might be 2-3 years or as much as 10. So, let’s add $500K to $1.5M
All told, our O-5 needs a minimum of about $1.2M and as much as $2.9M. Double those numbers if we want to cover the lifestyle of the retired O-5 with $300K of income. Surprisingly close to the 8x-16x numbers…
Cost
Almost all service members and their spouses should only consider Term Life Insurance. If someone is advocating Whole Life, Variable Life, Universal Life, or even worse, Indexed Universal Life, trap them at your six and light the wick.
Term Life Insurance is very inexpensive if we’re healthy. If we’re not healthy, that’s another story, and we may not even be able to qualify for life insurance anyway. A common range for a 20-year term policy for a healthy person in their early 40’s is $8-$15 per $100K per month. So, a $1M policy might cost $80-$150 per month, and it’s often less.
I won’t finger-wag about how many trips to Starbucks equals a monthly insurance premium, but it suffices to say that most of us could find this amount in our monthly spending and trade it for the assurance that our family will be okay if the worst happens.
Personally, I would shave that premium amount off TSP or IRA savings before I would go without adequate life insurance.
Compounding is great, but it won’t provide enough until we’re retirement-ready, at which point we can (and often do) surrender any remaining insurance policies.
Horror Stories
Term Life Insurance is meant to be bought. Whole Life and its cousins are meant to be sold. Plenty of us wake up and think, “I need to cover my spouse and kids if I die.” So we seek a product that will meet the need. We search out the cheapest Term Life policy and buy it. No one gives us a slick pitch about it because Term Life doesn’t pay squat for commissions. It sells itself and doesn’t need to be sold.
Whole Life Insurance, along with Variable Life, etc., must be sold. No one wakes up and thinks, “I need to partially cover my spouse and kids if I die, and perhaps in 20 years if interest rates go up and if the insurance salesman didn’t lie about policy performance, I can take a loan against the policy for a need I can’t even fathom today…”
Whole Life policies cost 10-20x as much as Term Life policies for the same coverage, so we rarely get the same coverage because we can’t afford those premiums. Yet, many of our peers get hornswoggled by insurance salesmen and buy paltry coverage for premiums that would easily buy enough Term Life coverage for our needs with plenty left over to invest; thus the adage: “Buy Term, invest the rest.”
When we hear about policies that cost a car payment and don’t provide a year’s worth of income, it’s hard to consider buying life insurance. We don’t have to be that horror story. Buy Term.
It’s Morbid
Yes, thinking about death is unpleasant. There’s no sugarcoating that. But I have spent too much time in the room with a grieving widow who’s trying to breathe and wonder how to feed and clothe her kids, and when she’ll have to explain why we can’t afford the things we used to afford since daddy died… I will take thinking about death long enough to get an insurance policy in place, rather than thinking about my wife and kids struggling every day of the week.
We show up to defend our nation and its founding ideals. We can show up to defend our family. Until our nest grows enough from decades of compounding, we need enough life insurance. There’s just no way around it. Cowboy up.
Math
We’ve covered the basics of how much we need based on giving Momma and the kids a chance to have the life we’d planned together, but another reason for being underinsured is that we don’t consider other math.
Inflation erodes the utility of life insurance. A 20-year $1M policy might buy a house in year 1, but by year 20, it only buys a $570K house if inflation is 3%. ($395K if it’s 5%). Education inflation is typically 5%+.
Thus, we may need to say $1.5M of coverage when we first decide to address this need, but we could need to layer on additional coverage some years later as life changes.
The amount of life insurance we need isn’t fire and forget. Slimy insurance salesmen know this and use it to try to sell us more coverage every time we PCS (this is actually the model for a certain company…). We often need more as we experience peak vulnerability, e.g., when expenses are growing, but income and savings haven’t caught up. We need less as the kids leave the payroll, the house is on glidepath for payoff, and the nest egg has compounded nicely.
Cleared to Rejoin
If I had a nickel for every family I meet that’s underinsured, I’d have enough to pay premiums on an appropriate-sized amount of Term Life Insurance. I would absolutely pay for enough Term Life Insurance before topping off my Roth IRA, TSP, or 401(k). There are few better ways to tell your family that you love them than to ensure they don’t have to worry about money on their worst day.
It’s time to get enough life insurance. Get ‘er dun!
Fight’s On!
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