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Consumer watch: Life insurance lessons

New job? Promotion? Growing family? Make sure your policy keeps up

Jan. 20, 2011 - 02:17PM   |   Last Updated: Jan. 20, 2011 - 02:17PM  |  
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The beginning of the new year usually is when we feel the urge to go over our finances to make sure everything is still in order and think about any changes that might need to be made.

Don't overlook life insurance. We may not instantly think of life insurance as a core part of our "finances," but it is — and letting it ride on autopilot is not wise.

Even more unwise would be to lump life insurance, with its regular premium payments, into your "discretionary spending" category — something you can drop or put off buying when you are struggling to pay other bills.

That's become a national trend because of the sour economy, said Greg Blake, executive director of life insurance products for USAA, who noted that USAA has seen fewer members drop their life insurance coverage than the industry nationwide.

"Our members see the importance of life insurance," he said.

"Life insurance shouldn't be on the cutting board," said J.J. Montanaro, certified financial planner for USAA, even for dual-income military families in which a spouse loses a job because of the economy or a permanent change of station move.

Life changes

Consider what life insurance is for — then consider the consequences if you don't have it, or enough of it, when tragedy strikes. Your family could be left in dire straits.

Everyone should periodically review his or her amount and type of coverage to see whether it still fits his or her circumstances, said Lisa Milman, vice president for marketing and sales for the nonprofit Army and Air Force Mutual Aid Association, which sells life insurance to Army and Air Force members and their families.

What kind of circumstances?

Well, have you gotten married? Had a child? Bought a house? Been promoted? Moved to a new location with a higher cost of living?

What about stockpiling for college? For babies being born now, the cost of a four-year degree at a public college is expected to be $150,000, Montanaro said.

Don't be put off by that big chunk of change, he said: "The reality is, it's a temporary need, and is ideally covered by term insurance."

If you're one of the many military couples squeezed financially by high mortgage payments on a home you couldn't sell at your previous duty station — while also paying rent on your current home — should your life insurance calculations take this into consideration? What would your family do if something happened to the primary breadwinner?

For active-duty members, a solid foundation is their Servicemembers' Group Life Insurance, which is administered by the Veterans Affairs Department. Premiums are $27 per month for the maximum $400,000 of coverage.

Something else to consider is the $100,000 "death gratuity" paid to survivors of all personnel who die on active duty.

Beyond that, only you can determine whether you need more coverage.

"Individual life insurance should complement SGLI, not replace it," USAA's Blake said.

To more accurately determine your needs, check out some life insurance calculators:

• VA: www.insurance.va.gov/SGLISITE/calculator/LifeIns101.htm">www.insurance.va.gov/SGLISITE/calculator/LifeIns101.htm.

• Navy Mutual Aid: www.navymutual.org/Calculators/LifeInsurance.aspx">www.navymutual.org/Calculators/LifeInsurance.aspx. This calculator factors in benefits provided by the military while on active duty, such as SGLI and other death benefits. It helps people determine what benefits they may need to replace with life insurance after leaving active duty.

Spouses

Don't forget to think about coverage for your spouse, particularly if he or she is not working. If you have SGLI, you can buy up to $100,000 in Family SGLI coverage for your spouse. Again, only you can determine if that's enough coverage.

Milman advises families to remember that even when spouses don't earn a second salary, their deaths could create financial pressures. For example, consider child care costs, or the costs to arrange care for an exceptional family member.

For spouses who are employed, would you need to replace that income if it was no longer there? Spouses may have life insurance paid for by their employer, but that insurance might be lost if the spouse leaves the company. Would the next employer provide life insurance, assuming the spouse finds that next employer?

This is something retired service members with a second career should consider, too.

"In the population in general, one in four people rely solely on life insurance provided by their employer," Blake said. "If they lose their job, they could lose their life insurance," so it's important to have your own.

Insurability

SGLI does not continue after you leave the military, although you can convert it to Veterans Group Life Insurance, which is more expensive (and gets progressively more so as you get older).

Conversely, Blake suggests younger troops should also consider the "insurability" factor. If you're injured or separated from service for medical reasons, you might no longer be insurable in the civilian world.

That could be a reason to think about additional coverage. "You may not be able to get it at a later time," Blake said.

Beneficiaries

When reviewing your life insurance needs, it's also important to make sure your beneficiary designations are up-to-date. While you're checking those designations, make sure you periodically discuss the policy locations and contact information with your spouse.

If you have SGLI, your death will automatically trigger notification steps, but other insurers must be notified after your death.

A large sum of money can be overwhelming, especially when dealing with death at the same time. Talk with your spouse ahead of time about options for the best use of the money.

Insurance companies may have a default option to leave the money in a "retained asset account" that earns minimal interest for you. Do your research ahead of time and discuss how you want to make the best use of the money.

Discuss whether your spouse will use financial planning. For SGLI, VGLI and Family SGLI beneficiaries, VA provides free third-party financial assistance to help you figure out how to manage the insurance payout.

Delving into life insurance questions is always a sobering experience. But better to think about those questions now and plan ahead than risk financial disaster for your family later.

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