Life Insurance and Your Growing Family

Getting married, starting a family, and transitioning out of the military are all exciting times in your life, but they also bring with them major changes, like a move, the need for childcare, or a new career. Changes like these can affect your life insurance needs going forward. While your service-provided Servicemembers’ Group Life Insurance (SGLI) might be more than sufficient when you are young and single, as you start your family, then grow your family and take on new obligations, your insurance needs can change.

When thinking about your future life insurance needs, you’ll want to consider a military-friendly life insurance plan (specifically one without aviation or active duty service restrictions) that not only meets your current needs but also gives you the flexibility to adjust your coverage or purchase additional coverage in the future. Your coverage does not have to – nor should it – be the exact same throughout your life.

While you may start out with only an SGLI policy, as your family grows, you may want to supplement that policy with additional coverage to ensure that your loved ones are taken care of in the future. After you leave the service, your SGLI coverage will expire. It can be converted to VGLI or specific whole life policies within a specific time frame, or you may want to shop around in the commercial sector for a replacement policy or two.

When to Reassess Your Needs

In general, it is a good idea to review your needs and life insurance policies at least annually. This ensures that major life events (the birth of a child, a home purchase, or a new financial obligation) are accounted for in your future coverage. When you’re young and just starting out, you may have few or no dependents relying on you for financial support, but as you age, that may change. Developing a habit of annually reviewing the terms of your home, car, life, and disability insurance coverage can prevent anything being left to chance.

It’s also important to set aside some time specifically to evaluate whether and how your life insurance needs have changed after any major life events, even if this means you’re looking at your policies and coverage off of the annual cycle.

Arguably, the most important events to account for are marriage and parenthood because they introduce an additional dependent into the mix. While your spouse may have their own income and not rely solely on your financial contributions, a child is fully reliant on their parents, and if something were to happen to you when your child was young, it’s important that they have the safety net of a life insurance policy in place. As difficult as it is to think about now, it is important to consider every possible future, which could mean purchasing an amount of military-friendly life insurance that not only matches your family’s minimum needs today, but considers the potential loss of immediate income, the loss of future income, and the cost of providing for child care in the future. Each new family member will have needs that your life insurance policy will have to cover.

That said, a growing family is not the only reason to reevaluate your life insurance coverage. Again, other life events that merit examining your coverage include buying a house (because you’ve increased your personal debt), transitioning out of the military (because you will lose your SGLI coverage), and retiring (because your income has changed). For example, term life insurance may have been the right choice to supplement SGLI while you were deploying, but you may want to transition to a permanent life insurance policy as a long-term estate planning solution.

Determining Your Needs as Your Family Grows

There are many ways to determine your current life insurance needs. Some of the most popular methods include:

• Income Multiple: This is a rough calculation to offset some number of years of future economic benefit, such as multiplying your current salary by 10 or 15. Consider accounting for future raises and promotions as well.
• Income and Education: This calculation is similar to income multiple, but adds in an additional sum of money to be used for future education expenses. After multiplying your current salary by 10 or 15, add an additional $100,000 or more for each child that has not yet attended college.
• Human Life Value: This is the present value of your after-tax future expected income for the duration that you would have otherwise contributed to the family finances. For example, if you have 22 years until retirement, calculate your expected income for the next 22 years, minus taxes (about 30%), to determine how much of an impact you would have had on your family’s finances over the remainder of your working years.
• Needs Approach: This involves offsetting current or planned debts that the beneficiary could not or would not be able to handle on their own – typically this involves a mortgage balance, present value of future education expenses for children, one or more new vehicle purchases, and a lump sum for the survivor’s ancillary expenses. It’s calculated by adding up all the expenses that would shift to your survivors (including immediate funeral costs and long-term mortgage payments) and subtracting the amount of money that they expect to have available to them to make those payments (including savings, investments, and other life insurance policies).

At Navy Mutual, we find that the Needs Approach is the most helpful for our Members. It provides the most accurate estimate of the coverage you need based on your entire financial picture. Our Sales Representatives offer free needs analyses to individuals who are interested in exploring how life insurance can help their loved ones.

The basic calculation to estimate the right amount of coverage through the Needs Approach is as follows:

1. Add up all outstanding financial obligations including mortgage payments, tuition for your children, and living expenses for your family.
2. Subtract the value of your assets that would be available for liquidation should you pass.

While seemingly simple, the calculation does require a full picture of your financial situation, and an idea of your goals and aspirations for the future. Is it your hope that your children attend college? A sum of money needs to be added to financial obligations to help pay for that education. Is it your hope that your surviving spouse wouldn’t have to work? How much replacement income would they need each year to maintain their standard of living? Once you add up all your obligations and subtract available assets, the resulting number is the amount of money that would be required to take care of your family’s needs if anything were to happen to you. It may be wise to account for inflation and consider what that amount would inflate to in the future, when your loved ones actually need the money. This is the number that should stay top-of-mind as you shop around for life insurance coverage.