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How much insurance do you need?

Jan. 15, 2010 - 10:37AM   |   Last Updated: Jan. 15, 2010 - 10:37AM  |  
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Life insurance

You may think $400,000 is a lot of money — and it is. But when it comes to life insurance, is $400,000 in Servicemembers' Group Life Insurance enough?

There is no one answer, because everyone's circumstances are different. The new year is a good time to take stock of your situation to make sure your loved ones would not have to struggle financially in the event of your death.

"A lot of people think $400,000 is all the money in the world, but for someone with a spouse and a couple of little kids, it's not enough life insurance," said June Walbert, a certified financial planner with USAA Financial Planning Services who is also a lieutenant colonel in the Army Reserve.

If you die, life insurance can take care of financial needs not met by other survivor benefits for those depending on your income. Depending on how the money is invested, the inflation rate and other factors, $400,000 might generate around $15,000 to $30,000 in annual income for beneficiaries. But there are other significant survivor benefits, such as Social Security and education assistance, that should be considered.

For information on these benefits, go to www.vba.va.gov/survivors/calculators.htm">www.vba.va.gov/survivors/calculators.htm. Other agencies and organizations also offer help in determining your benefits, including the Armed Forces Services Corp. and Navy Mutual Aid Association, and personnel officials of the military services.

Unless you opt out of the $400,000 SGLI, or choose to reduce the amount of your coverage, you are automatically enrolled for the maximum amount, at a cost of $27 per month. You can buy coverage for your spouse in increments up to a maximum of $100,000, and each of your children is automatically insured for $10,000 at no cost to you.

So how do you go about figuring out what's best for you? Consider these factors:

• Outstanding debts, such as credit cards, car loans, mortgage or student loans.

• Monthly living expenses and medical expenses.

• Any special needs.

• Your spouse's employment situation.

• Children's day care and college needs.

• Other family members who may need support, such as siblings or parents.

The Veterans Affairs Department suggests adding up all your financial obligations and the net income needed to support your survivors annually, then subtract your assets (such as savings, investments) to determine the amount of life insurance you need.

VA has an insurance calculator that can help with some of this math at www.insurance.va.gov">www.insurance.va.gov, in its SGLI section.

Term insurance generally is cheaper, because as its name implies, it provides life insurance for a certain term. The younger you are and the healthier you are, Walbert says, the cheaper the premium.

She suggests checking into level term insurance for additional coverage. The death benefit stays the same whether it is paid out in the first month or the 360th month of the term.

Generally, premiums for term insurance will rise after the expiration of the initial term as outlined in the contract. Term insurance doesn't build up cash value.

Permanent insurance — such as whole life, universal life and variable life — is long term, and it is paid regardless of how long you live, so it's more expensive.

The policies include a death benefit and, in some cases, build up a cash value over time. You might consider this for a smaller part of your needs, Walbert said, because it might make sense later.

"It's particularly important with permanent insurance that service members take a deep dive into that policy and know what they're buying," she said.

Before supplementing SGLI, military members should make sure the policy does not include a "war clause" — which does not pay benefits if the death is terrorism- or combat-related.

Most states mandate a minimum 10-day "free look" period after buying a policy, during which you can cancel it and get a full refund of any premiums paid, according to the National Association of Insurance Commissioners.

If you cancel the policy, remember to also cancel any allotments you set up to pay insurance premiums. If you're deploying, tell the person you've designated as your power of attorney to look for the policy in the mail.

Home insurance

You may think you don't need insurance for your personal property if you're living in the barracks or base housing, or even if you're renting off base.

But almost everyone has valuable things, such as a television or a high school class ring. The cost of possessions adds up, particularly if they are irreplaceable.

Renters policies are inexpensive — you can get basic coverage for less than $20 a month, although your cost will depend on the amount of liability and the value of the items.

Purchase additional coverage for personal property of high value, such as the ring you inherited from your grandmother.

Other things to think about:

• Double-check that the policy covers water and flood damage. If it doesn't, find a policy that does.

• Some policies cover your personal property when you travel or are on deployment.

In many states, most policies exclude coverage for damage caused directly or indirectly by war, according to the National Association of Insurance Commissioners.

However, USAA's renters and homeowners insurance, for example, covers loss and damage of items taken on deployment, with the exception of computers and electronics.

• If you live in privatized military housing, check with the housing company about renters insurance. Depending on each military service's requirement, the developer has the option of providing a standard renters insurance package, with reasonable deductible and policy limits, to its tenants.

• Take an inventory before purchasing renters or homeowners insurance, with an itemized list of everything, including price estimates, serial numbers, receipts if available and purchase dates. Not only will this help you purchase the insurance you need, but it also will provide documentation should you need to file a claim.

• Know whether your policy provides full replacement value or if reimbursement is based on an item's age and condition.

• The lower the deductible on your policy, the more the premiums will cost.

• Find out whether your company will give you a discount if you bundle different types of insurance, such as auto and renters insurance.

• Homeowners need separate flood insurance policies. Water incidents happen even to people who live in low-risk areas.

Auto insurance

When it comes to auto insurance, June Walbert, a certified financial planner with USAA Financial Planning Services, said one of the most common mistakes she sees "is that people opt for the lowest limits of liabilities that their current state requires."

She advises troops, regardless of how junior, to have $100,000 per person plus $300,000 liability per accident, and $100,000 in property damage coverage.

As people get older and gain seniority in rank, they should review their assets and cover at least their net worth with liability insurance, she said.

A state might require $25,000 liability coverage per person, but that might be barely enough to cover an ambulance ride to a hospital, she said.

Shop around. Liability insurance can be inexpensive, and to defray the cost of increased limits, you can set your deductible higher — $500 — for your collision coverage.

"Sometimes a big chunk of your overall premiums is due to a low collision deductible," Walbert said. "Bump that up as well as your liability limits, and you'll be doing yourself a financial favor."

Other things to think about:

• If you're deploying and plan to store your car while you're gone, you still need car insurance in case something happens, such as a fire, so continue to pay those premiums. But you may no longer need collision coverage because the car won't be on the road.

• Make sure you notify your insurance company before you make a permanent change-of-station move. If the insurance company doesn't have a license to do business in your new state, you'll have to find a new company.

• If you lease a car, you still have to buy an auto insurance policy.

• If you're being reassigned overseas, be aware that some nations do not allow U.S. companies to insure cars. Check with your insurance company to see whether you can maintain your current policy or if you must get a new one in your host country.

Answers by RallyPoint

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