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It pays to have enough life insurance: Policies beyond SGLI can spell financial security

Jan. 21, 2012 - 12:32PM   |   Last Updated: Jan. 21, 2012 - 12:32PM  |  
Vivianne Wersel holds a photographer of her late husband, Marine Corps Lt. Col. Richard Wersel, who died of a heart attack in 2005. A decision years earlier to purchase extra life insurance helped the Wersel family after Richard Wersel's death.
Vivianne Wersel holds a photographer of her late husband, Marine Corps Lt. Col. Richard Wersel, who died of a heart attack in 2005. A decision years earlier to purchase extra life insurance helped the Wersel family after Richard Wersel's death. (Thomas Brown / Staff)
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Having the money from an extra life insurance policy above and beyond Servicemembers' Group Life Insurance gave Vivianne Wersel extra options after her Marine husband died in early 2005.

"It allowed me to stay in the area of Camp Lejeune, where my children wanted to stay, where their friends were," she said. The children were 12 and 14 at the time.

Otherwise, she said, she might have had to return to California to regroup with her family.

"My parents would have been glad to have me," she said, but the extra $200,000 on top of the couple's SGLI policy allowed her to stay near Lejeune until her children graduated from high school, as she continued her career as an audiologist.

"That extra $200,000, knowing I had it, was instant security, at that moment in time," Wersel said.

When her husband, Lt. Col. Richard Wersel, died from heart failure at age 43 — one week after returning from deployment to Iraq — the SGLI maximum was $250,000. It later increased to $400,000.

Thanks to a commanding officer who urged his troops to get their affairs in order in 1993, when Marines at Camp Pendleton, Calif., were expecting to deploy to Somalia, the Wersels bought the extra life insurance from a company now known as First Command. It turns out the Marines didn't deploy, but Wersel is glad they did some insurance planning at that time.

Insurers and financial experts alike agree that the Veterans Affairs Department's SGLI program is a good deal for troops — costing 6.5 cents per $1,000 of coverage, regardless of a service member's age.

It's available in increments of $50,000, up to $400,000. Premiums for the maximum coverage are automatically deducted from military pay, at a cost of $27 a month. Service members must submit a written request to refuse coverage or to choose partial coverage.

Gauging your needs

But how do you know whether you need more — or less — than $400,000 in life insurance?

There are various broad rules of thumb. For example, some say you should have insurance equal to eight to 10 times your income.

"But we recommend taking a magnifying glass to look at your individual situation," said J.J. Montanaro, a financial planner for USAA.

For example, do you want your spouse to be able to pay off debts such as cars and the mortgage? Do you want to fund your spouse's schooling so he or she can get into the workforce? Do you have a family member with special needs or parents who rely on you for support?

When the Wersels were making their plans in 1993, $200,000 was a lot of money. Vivianne Wersel said that as she and Richard discussed their finances before he went to Iraq a decade later, they didn't feel they needed to increase that amount.

"He joked that he married me for my earning potential," said Wersel, an audiologist at the new hospital at Fort Belvoir, Va. "That was his conservative logic. He felt I had the ability to earn a good income. Insurance was not for me to quit work, it was to help fill the financial gap left by the loss of his salary.

"My husband provided for us. We were not caught cold."

She has invested most of the insurance money and tries not to dip into it. But she has found that even with government benefits and her salary, meeting all expenses and the extra costs of rearing children is challenging.

"My financial future is based on me and me alone to take care of me and my children," she said.

To start the planning process, Montanaro suggests using an insurance needs calculator. A good one is on the VA website, at www.insurance.va.gov/sgliSite/calculator/LifeIns101.htm.

Among the factors to consider are the standard benefits for the spouse and children when a service member dies on active duty, the most significant being the $100,000 "death gratuity."

Other benefits include, but are not limited to, VA's Dependency and Indemnity Compensation at the basic monthly rate of $1,195 for surviving spouses, plus $296 per child.

Running the numbers

According to the most recent government calculations, a middle-income family with a child born in 2010 can expect to spend about $226,920 on food, shelter and other necessities to raise that child to age 18 — before even thinking about college costs.

If you have four children, that's approaching $1 million, notes June Walbert, another USAA financial planner. "And if you have four children, is it a reasonable expectation for the spouse to go to work?" she said.

Retired Cmdr. Jack McVeigh, vice president of membership for the Navy Mutual Aid Association, which sells life insurance, said the SGLI program is great, and everyone should take advantage of it.

But while $400,000 is a lot of money, "if something happens when you're young, it's not going to last your family for the rest of their lives," McVeigh said.

On the other hand, if you're a single service member with no one depending on you for financial support, you probably don't need a lot of life insurance, said Gerri Walsh, president of the Financial Industry Regulatory Authority Investor Education Foundation.

"If you're on active duty, SGLI is one of the most affordable insurance policies available," Walsh said.

Yet when FINRA has visited military bases for financial education seminars, "we see a lot of young enlisteds talking about being sold private insurance contracts," she said.

Laws and Defense Department regulations over the past several years have increased protections for troops against insurance agents selling expensive policies they don't need. Yet questionable practices continue, such as agents targeting young troops at kiosks in local off-base shopping malls.

"Buying life insurance is a very serious proposition," said USAA's Walbert. "The shopping mall is not the place to sign on the dotted line."

Factors to consider

Other things to consider about life insurance:

Readjust. Life insurance is not "one and done," Montanaro said. "It's something you need to stay on top of." Things change — people get married, buy houses, have children. From time to time, you may need to reconsider the amount of insurance you need.

Later in life, if your financial situation has changed so that you've saved more than enough money to provide for your family in the event of your death, you might consider whether you need life insurance at all.

Research. Once you decide whether you need term or permanent insurance, you should compare policy features and prices. If you're in the military and looking to buy extra insurance to supplement SGLI, make sure that extra policy doesn't include a war clause or aviation clause that would prevent a payout if you died in the line of duty. SGLI has no such exclusions.

Don't rush. Check out the company before you buy. There's no rush — and if a salesman claims there is, that's a red flag.

The financial health of an insurance company is important so that the company will have the money to pay your beneficiaries in the event of your death. Visit www.standardandpoors.com or www.ambest.com. Check out the company with your state insurance regulator. Go to the National Association of Insurance Commissioners website at www.naic.org, and click on "States and Jurisdiction Map" to link to your state's insurance regulator.

"You can check to make sure they're licensed, and see if they've been in trouble with regulators," Walsh said. "Certainly, you do not want to do business with an insurance representative that is not licensed in your state."

Keep it updated. As your life changes, make sure you've made needed changes in the beneficiaries of your policy.

If you originally named your parents as SGLI beneficiaries when you joined the military but you've since married and had children, change the beneficiary designation.

Don't assume that your parent would voluntarily give all or even part of $400,000 after your death to your surviving spouse and children. There are sad, real-life stories of families being torn apart by such situations.

Similarly, if you have divorced, you also will probably want to change your beneficiary designation — unless you want your ex-spouse to receive your life insurance proceeds.

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