Bottom Line Up Front (BLUF): Yes, if you have dependents (spouse/kids). If so, get enough level term life insurance to cover 10x your annual income before you retire/separate… preferably before you get diagnosed with any chronic medical issues. Beware of “financial advisors” who sell permanent, universal, or whole life insurance… even when it isn’t what you need. If you don’t have dependents, you don’t need life insurance.
As I started creating my financial plan for after retirement, I met with several “financial advisors” (i.e. life insurance sales people). I sat through hours of meetings and sales pitches. Some were very honest about the process, but others were just trying to earn a commission from selling expensive whole life or universal life insurance plans.
Now that I’ve purchased life insurance for my life after the military, I want to tell you what I learned.
What Life Insurance should be for
Many people buy life insurance with the expectation of a big pay day. However, that - I feel - is the wrong way to look at it. Life insurance should not be a money maker. In the best case, you should never use it. Instead, it is a hedge that ensures that your family (if you have one) does not lose everything if you pass away unexpectedly. It gives your family time to find a new way to support themselves.
Ask yourself: If you died tomorrow, how would your family pay the bills? If you can’t answer that question, you need level term life insurance.
For military members, get your term life insurance before you retire/separate
Military members should research and buy life insurance before they retire. Though there are options like the VGLI for veterans, it is way more expensive than term life insurance and gets more expensive as you age (see the VGLI price charts for more details). If you are in decent health, term life insurance could save you tens of thousands over the VGLI.
If you are buying term life insurance, get it while you are still healthy (preferrably, before you are diagnosed with any chronic health issues). Insurance companies will review your medical records and give you a simple in-home physical to determine what price to charge you based on your health. Chronic issues that might affect your lifespan (like sleep apnea) can increase the cost of insurance.
Worse, some military members can become uninsurable due to chronic medical issues that they get documented. Getting insurance early might help you avoid this situation.
How much term life insurance do you need?
If you have dependents who depend on your income to live, you should get life insurance that pays at least 10x your annual income. For example, if you make $80,000 a year, you should get at least $800,000 in life insurance coverage. Note: You might want to consider increasing the amount to adjust for inflation, up to 1.5-2x times as much. The Rule of 72 can help you estimate.
The length of your term is also important. If you have kids, you want to cover the amount of time your kids might still need money from you (i.e. through college age). If not, you’ll still want to cover a significant period (20-30 years) to cover the majority of your working years. Note: The longer the term, the higher the monthly payments.
Finally, make sure you are getting level term life insurance. Some companies will try to sell you insurance where the price goes up as you age (like the VGLI). Though it starts out cheaper, they seem designed to make them to expensive to maintain when you are old enough to need it.
Most people just need Level Term Life Insurance
I recommend level term life insurance because that is what most people need (especially military members, who tend to be in lower-to-middle class tax brackets). Plus is the cheapest option, often between $30-$80/month for a lot of coverage. However, many “Financial Advisors” (a.k.a. insurance salespeople) will try to convince you that you need permanent, whole, or universal life insurance. If they do, BEWARE. They want you to get it, not because it is the right investment for you, but because they earn a massive commission on it.
Basically, the monthly payments on these plans are usually 10x-20x that of term life insurance (instead of $30-$80/month for term, think $1,000+/month for whole life). They slowly generate “cash value”, but may only break even after you’ve paid $1,000/month for 5+ years. In the meantime, the opportunity cost of buying this vs. investing $1,000/month (or $60,000 over 5 years) in the market could be enormous.
These plans can be useful in some situations, though. If you make too much to invest in a Roth IRA (i.e. $129,000 for single filers, or $204,000 for married filers) and don’t have access to invest in a Roth 401K, these are another method of accumulating tax-free gains where you can borrow cash value from yourself (without paying taxes). These plans are sometimes called the “Rich Man’s Roth”; however, the fees can be astronomical, making them an expensive choice unless you fall into a very high tax bracket.
Beware of (some) “Financial Advisors”
Ok, so what you have to know is that anyone can call themselves a “Financial Advisor.” Unless your advisor is a fiduciary being paid as a fee-only advisor, they are probably selling you something. For most, they are selling expensive permanent, whole, or universal life insurance to get large commissions.
Be careful when researching your options, as many of them are very convincing. They’ll tell you about how whole life saves you from paying taxes on investments. However, they fail to mention that:
- …you are investing after-tax dollars (so, you are already paying tax on your money).
- …even in a regular brokerage account, you mighta modest rate of_capital gains taxes_ (if your income stays below certain IRS thresholds, and only sell after holding investments for 1 year or longer).
- …the fees/costs of whole life insurance can be closer to 50-90% for the first several years (vs. the 0-15% long-term capital gains tax rate or 22-32% short-term capital gains tax rates that most people might pay). Instead of paying the IRS more, you pay them more instead.
With all of that said, life insurance salespeople are not all bad. I did have some amazing discussions with a couple financial advisors that helped me rethink other parts of my finances. And, I do have a greater understanding of the types of life insurance.
Just be aware that a salesperson’s motivations and goals may not align with yours. If someone is trying hard to sell you something (vs. just telling you what it is), then it is usually not in your best interest. Note: Don’t buy just because a salesperson talked you into it. Get the numbers and decide if you understand how it helps your finances. If you don’t understand it, don’t invest in it.
Finally, if you don’t have dependents, you don’t need life insurance
If no one depends on your income to live (i.e. you are single/no kids), you don’t need life insurance. Invest your money for yourself instead.
Who do I suggest to buy life insurance through?
Of all the companies/organizations I spoke with, American Armed Forces Mutual Aid Association (AAFMAA) was the most straightforward and best value, offering up to $800,000 for 30 years in level term life insurance for a reasonable price. AAFMAA is a non-profit mutual fund established in 1879 for military members and their families. To see their offerings, start here.
Note: I also picked up an additional $400,000 of term life insurance (through another company) with the ability to convert it to permanent life insurance in the future. Why? I needed a little more term coverage, but also wanted the option to convert in case I max out all of my other investments ($26,500/year between both IRA and 401K/TSP) and want more diversification. The jury is still out whether I will actually follow through it… the costs are absolutely killer, and I’m not sure the numbers make sense. For now, it’s worth $25/month to keep my options open as I continue to research other options.