military life insurance options

Converting Military Life Insurance to Whole Life

Military life insurance is one of many benefits offered to active duty service members and veterans, but it’s not the only insurance option available. In fact, permanent life insurance policies like properly structured whole life insurance can offer more coverage and benefits than Servicemembers’ Group Life Insurance (SGLI), Family Servicemembers’ Group Life Insurance (FSGLI), and Veteran’s Group Life Insurance (VGLI).

Sometimes it makes more sense to opt for a permanent insurance option, or even utilize a VGLI, SGLI, or FSGLI policy in addition to a whole life policy. In this article, we’ll examine each type of military life insurance to help you decide which type of policy is right for your family.

What is Whole Life Insurance?

Whole life insurance is a type of insurance that guarantees you coverage for life. You lock in a premium rate and it remains the same for the duration of your policy, so it won’t increase as you get older or if your health declines. When you die, your policy pays out a death benefit to the beneficiary/beneficiaries of your choosing. But whole life insurance comes with lots of living benefits too.

When you pay your annual premium, part of that money goes toward your death benefit. The other part of it goes toward your policy’s cash value. This is a unique feature to whole life insurance. Think of the cash value of your policy as a built-in savings account. When your policy is structured through a mutual insurance company, it earns interest and potential dividends. In this way, your whole life insurance policy works to grow your money and functions as your own bank.

Once you’ve begun to accumulate cash value in your whole life insurance policy, you can borrow that cash value for anything you choose. You don’t need to get approved by a lender or have a certain credit score to access your cash value. And you don’t need to put up anything as collateral either—the collateral is the death benefit of your insurance policy.

Why would you want to borrow your cash value? There are a number of reasons it makes sense to take out a “policy loan” instead of borrowing from a bank; the two main reasons are tax advantages and opportunity cost.

Tax Advantages

Whole life insurance is a popular financial tool because it offers superior tax advantages compared to investment vehicles like qualified retirement plans (401k, IRA, Roth IRA). When you put money into an insurance policy, your premium is paid with after-tax dollars. Then it earns interest and dividends tax free. Unlike qualified plans, you can access your earnings at any time without penalty (qualified plans typically charge a 10% penalty if distributions are taken before age 59 1/2) and you can use your cash value tax free when you take out a policy loan.

The reason it makes sense to compare whole life insurance to retirement products is that many people use their insurance policies to fund tax-free retirement. Rather than withdrawing funds from their policies and paying taxes on the interest and dividends they’ve earned, they opt to take out tax-free policy loans. The policyholder gets to determine the payback schedule of the loan, and in the case of retirement, loans are typically not paid back. Rather, when the policyholder passes away, the loan amount is deducted from the death benefit of the insurance policy.

What if you don’t want to deplete the death benefit of your policy to fund your retirement? What if you want to make sure your family is well taken care of with the largest death benefit possible? Well, there are tax advantages for them too.

In most cases, the death benefit of a whole life insurance policy is tax free and isn’t subject to estate taxes either. The same cannot always be said for funds leftover in a qualified retirement plan. And because whole life insurance isn’t subject to probate in many states, your family receives money quickly without any added stress.

Opportunity Cost

The second reason you might want to borrow from the cash value of a whole life insurance policy is because it allows you to capture opportunity cost and essentially earn interest on yourself. Whole life insurance is referred to as an “AND” asset because you can take out a policy loan AND still earn interest on the full value of your insurance policy.

Say you have $25,000 in savings and you withdraw it to buy a car. You must build up your savings from $0 all over again and you lose any compound interest paid to you by your bank or credit union. What if you could borrow that $25,000 savings to pay for the car, but still earn compound interest on the full $25,000? With whole life insurance, you can. Each dollar works twice as hard for you—you are spending it and earning on it at the same time.

Now let’s say that instead of buying a car you use that $25,000 as a downpayment on investment real estate. When you utilize a policy loan with the cash value of your whole life insurance policy instead of taking that money from savings, you not only earn interest and potential dividends on the full $25,000 from your insurer, you also earn equity and passive income from your real estate purchase. In this instance, your dollar is working three times as hard for you—it is being spent once but earning twice.

A note on real estate purchases for military personnel: You are entitled to special benefits through the VA, including housing loans. These loans can be used on multiple properties at once. Combined with a policy loan from the cash value of your whole life insurance, you may have a unique opportunity to capitalize on real estate as an asset to create equity in your financial portfolio. Take a look at this short article from Navy veteran and Wealth Strategist Gary Pinkerton to learn more: “Veteran and Military Advantages in Real Estate Investing”

Types of Military Life Insurance

Military service members, veterans, and their families are eligible for various types of military life insurance group policies. Regardless of the type, all are term life insurance policies. Term life insurance isn’t guaranteed for life. It’s only valid for a predetermined time period. Once the term is up, the policyholder must apply for additional insurance or lose coverage. In some cases, the same amount of insurance coverage will cost more than it did in the previous term due to changes in your age or health.

Military life insurance policies don’t come with living benefits like cash value, policy loans and tax advantages. They don’t earn guaranteed interest and they don’t earn potential dividends. The only benefits included with term life insurance are death and disablement benefits. If you don’t pass away or become disabled within the specified term, you and your family won’t receive anything and the money spent on insurance premiums is lost.

Based on information provided from the Department of Veterans Affairs (VA), here are the various types of term insurance policies for military service members, military families, and veterans:

Servicemembers’ Group Life Insurance (SGLI)

WHO IT’S FOR:

Qualifying military personnel:

  • Active duty Air Force, Army, Coast Guard, Marines, and Navy
  • Active National Guard and Ready Reserve, and inactives with 12 training periods per year
  • Military academy cadets and midshipmen
  • ROTC in training
  • Individual Ready Reserve (IRR) volunteers
  • NOAA and Public Health Service commissioned members

APPLICATION PROCESS:

SGLI policies are automatically provided by the U.S. government to qualifying military personnel.

COST & COVERAGE:

SGLI premiums for qualifying military personnel are $25/month for $400,000 in insurance coverage and a potential $25,000–$100,000 in coverage if you experience a traumatic injury during service. Premiums are the same regardless of your age or health status. You can reduce your coverage in increments of $50,000 for a lower monthly premium or opt out of coverage all together.

TERM:

SGLI policies are valid as long as qualifying military personnel meet active-duty requirements. After you leave service, you’re covered for 120 days. If you’re fully disabled your coverage may be extended up to 2 years. Once your term is expired, you are no longer insured and must either apply for a VGLI policy (restrictions apply) or a civilian life insurance policy.

SGLI or Whole Life?

If you’re currently an active service member with an SGLI policy, it’s possible to covert your policy to whole life insurance, but given how inexpensive ($25/month for $400,000 in insurance coverage) it is to maintain an SGLI policy while you’re in the military, it usually makes more sense to keep your policy and open an additional whole life insurance policy.

Why have both?

Often, a $400,000 insurance policy isn’t enough coverage for your family. Having whole life insurance provides additional coverage and money you can access while you’re still alive for anything you might need. If you plan on starting a business once you retire from the military, the cash value of your whole life insurance policy functions as business capital. What about college education for your kids? Buying a home? Family vacations? All can be paid for using your insurance policy as your own bank. Keep your SGLI policy for its low-cost death and disablement benefit, but add a whole life policy for its many living benefits.

Family Servicemembers’ Group Life Insurance (FSGLI)

WHO IT’S FOR:

Spouses and dependent children of qualifying military personnel:

  • Active duty Air Force, Army, Coast Guard, Marines, and Navy
  • Active National Guard and Ready Reserve, and inactives with 12 training periods per year
  • Military academy cadets and midshipmen
  • ROTC in training
  • Individual Ready Reserve (IRR) volunteers
  • NOAA and Public Health Service commissioned members

APPLICATION PROCESS:

FSGLI policies are automatically provided by the U.S. government for children and civilian spouses of qualifying military personnel who already have an SGLI policy. If your spouse is in the military, he/she will need to apply separately.

COST & COVERAGE:

FSGLI spousal premiums are dependent upon age and can offer up to $100,000 in insurance coverage. You can reduce coverage in increments of $10,000 for a lower monthly premium or opt out of coverage all together. Children under age 18 may receive $10,000 in insurance coverage at no cost. Coverage may be extended for dependent children over the age of 18 who are in school full-time or are disabled.

TERM:

FSGLI policies are valid as long as qualifying military personnel meet active duty requirements. After you leave service, you are covered for 120 days, at which time your spouse and children are no longer insured. At this time, you must find civilian insurance coverage for your family.

FSGLI or Whole Life?

With whole life insurance, you have the ability to add on policy riders—supplemental insurance for a low cost (and sometimes for free). There are riders for children and for your spouse. It’s also possible to take out separate whole life insurance policies for your kids and your significant other—even your parents. Together, your family’s policies increase the power of your family bank. Trusts can be set up and wealth passed on for generations, just like the Rockefellers.

Veterans’ Group Life Insurance (VGLI)

WHO IT’S FOR:

Qualifying veterans and former military personnel:

  • Military personnel within 1 year and 120 days of being released from active-duty
  • National Guard or Ready Reserves members within 1 year and 120 days of being release/retired
  • National Guard or Ready Reserves members who were disabled or injured on duty

APPLICATION PROCESS:

You are not automatically enrolled in a VGLI policy. You will need to submit an application to be considered for insurance. If you are within 240 days of active-duty service, you won’t need a medical exam. If you apply after 240 days of active-duty service, you will need to prove you are in good health to qualify for insurance.

COST & COVERAGE:

You can receive up to $400,000 of insurance with a VGLI policy. Premiums vary depending on your age. They are considerably more expensive than an SGLI policy and increase every five years. You also have the option to increase your coverage by $25,000 every five years up to $400,000. Your policy premium will reflect your increase in coverage.

TERM:

You can choose to extend the term of your VGLI policy indefinitely, but it’s worth noting that by age 75, you would owe $1,840/month in premiums to remain insured. In many cases, it’s more cost effective to transfer your military life insurance to civilian policy once you’re no longer active duty.

VGLI or Whole Life?

If you have a VGLI policy, you may be given special considerations when it comes to converting to a permanent life insurance product like whole life insurance.

  1. You may not need a medical exam to qualify for whole life insurance.
  2. You’ll likely be able to convert at standard premium rates.

In addition to being able to qualify at standard premium rates without proof of good health, your whole life policy comes with a set premium—it won’t increase every five years like your VGLI policy—and you can start earning cash value, interest, potential dividends, and tax advantages. Remember, you can use your whole life insurance policy to help fund your retirement, leave a financial legacy for your family, or as a financial foundation that allows you to capitalize on other investment opportunities.

Not all mutual insurance companies offer these considerations to veterans; fortunately at Paradigm Life our Wealth Strategists (some of them veterans themselves) work with top-rated insurance companies known for providing great service to military personnel.

Application Process, Cost & Coverage

When you apply for whole life insurance with Paradigm Life, the first step is to set up a free consultation with a Wealth Strategist. We’ll outline your financial goals and your budget to find the right insurance products and carrier for your needs. The initial phone call/virtual meeting will take about an hour and we’ll answer any questions you may have.

After you initial consultation, your Wealth Strategist will provide a free illustration showing you insurance policy options. Even if whole life insurance isn’t the right route at the time, we can offer term and disability options outside of what is offered with military life insurance from the VA. If subsequent phone calls/virtual meetings are required, they are always free to you. We’ll work with you as long as it takes to find the best solution for you and your family.

Helpful items to have ready for your consultation:

  • A copy of your separation papers
  • Proof of insurance, if you currently have a SGLI, FSGLI, or VGLI policy
  • A copy of your least leave & earnings statement
  • A list of financial goals

The cost of your whole life insurance premium will depend on the amount of coverage you select. Age and health may play a factor depending on when you apply and what current military life insurance coverage you have. Any additional riders may also affect your policy premium. For policy examples, check out our Case Study tab on our website. Keep in mind that your Wealth Strategist will work with you to find a policy that fits your needs and budget.

Once your application is approved and has gone through underwriting and your first policy premium is paid, you will be covered. Whole life insurance coverage is guaranteed for life, so long as your policy doesn’t lapse due to unpaid premiums. If you think you’d like to increase your coverage at a later date, ask your Wealth Strategist about a guaranteed insurability rider, which will allow you to purchase a more affordable policy now and increase it every 3-5 years without additional medical exams or proof of good health.

Conclusion

Military life insurance is a great benefit for our country’s service members, but it isn’t your only option, and may become prohibitively expensive in your later years. For insurance coverage that is guaranteed for life (with rates that won’t go up) whole life insurance may be a better option.

Whether you choose to convert from military life insurance to a whole life policy or supplement your current military life insurance with additional private sector life insurance, whole life offers living benefits not found with other policies, including tax advantages, cash value, policy loans and liquidity. It functions as your own personal bank and can help create a solid foundation for growing and protecting wealth.

Speak to a Wealth Strategist today to see if whole life insurance is right for you and your family, regardless of where you are at in your military career.