Nickel on the Grass: Fighter Pilots and Life Insurance

Today is Memorial Day and way too many of us are remembering our brothers and sisters who’ve paid the ultimate price for the freedoms we all enjoy.  Death has too many dimensions and complications to count.  The emotional wounds are bad enough, but there are serious financial consequences of an early death.  While we can’t solve every post-mortem problem for our families, putting life insurance in place goes a long way towards giving our survivors options and space to grieve without worrying so much about the finances.

Philosophy of Life Insurance

I have a general philosophy that you should only purchase insurance when the risk of financial loss is catastrophic.  A car wreck that generates six or seven-figure liability suit is catastrophic, so we buy adequate automobile and maybe even umbrella liability insurance.  A flat screen TV that blows a Fetzer valve and generates a $500 replacement cost is not catastrophic, so we skip the hyper-sold policy at the cash register.

The death of a primary-earning spouse is a probably catastrophe.  The death of non-earning spouse may not be a direct financial catastrophe, but stay-at-home parents generate tremendous economic value to a household, so the indirect financial catastrophe is very real.  The death of a non-earning child is an emotional catastrophe, but likely not a financial one.

Most families will want to focus life insurance calculations on the primary earner, then the caregiving spouse while children are still in the home, and skip life insurance on children.  Finally, when thinking about life insurance, it’s probably better to have a little too much, starting a little too soon, and kept for a little too long, than the opposites.

The Military Life Insurance Landscape

You’re likely tracking that the military offers $400K of SGLI (Serviceman’s Group Life Insurance) for $25/month and $100K of FSGLI (Family SGLI) for the spouse. Spouse coverage starts at $4.50 but increases with age to as much as $45 per month.  SGLI is a pretty good deal, especially because many insurance companies won’t insure military members for a combat-related death.  In the early years of your career, SGLI may be enough.  But as soon as you have children or buy a house, you may outgrow SGLI alone.

In addition to SGLI, the military pays a $100K death gratuity to the surviving spouse to defray initial costs before SGLI pays out.  Thus, you can think of SGLI as really being $500K of coverage.

When you retire or separate, SGLI goes away and you have the option to purchase VGLI (Veteran’s Group Life Insurance).  VGLI is pricey compared to many commercially-available policies, but you generally don’t have to prove insurability to get it.  If your health has declined during active duty, VGLI may be your only realistic option.

Life insurance gets more expensive as you get older since older people die more frequently than younger people.  Life insurance gets more expensive as health issues stack up too.  If you’re a cancer survivor, you may not be insurable by most companies.  If you’re a smoker, expect to pay a lot more if you qualify at all.

There are other death and injury-related benefits that aren’t specifically life insurance, such as the Survivor Benefit Plan (SBP) and Traumatic Injury Insurance (offered through the SGLI program), but I’ll cover those another time and focus just on life insurance today.

Commercial Life Insurance for Fighter Pilots

I am aware of only three companies that will write a life insurance policy on a fighter pilot (even when you’re chained to a desk in the 5-sided well-of-souls): USAA, Navy Mutual, and AAFMAA (Army Air Force Mutual Aid Association).   Each company tends to offer competitive rates for Term Life Insurance as well as generous treatment of combat-related death.

Insurance companies will generally offer you a limited amount based on your income.  A captain qualifies for less than a colonel, but as you earn more, you can apply for a new policy to increase your coverage.  An O-5 making $150K is likely to qualify for between $1M-$1.5M.  Companies aren’t interested in selling you a $5M policy at that income level because it creates a moral hazard where you or your beneficiaries might view you as significantly more valuable in worm-food form.

Applying for life insurance is generally quick and painless online or over-the-phone.  Companies will give you a quote after interviewing you and make a determination after verifying your health with a quick visit by or to a medical professional for blood and vitals.

How Much Life Insurance do Fighter Pilots Need?

There are as many techniques for this as there are for gunning a brand-new 2FL off the perch.  The technique I like to start families thinking about begins by exploring likely family needs after a bread-winner dies:

• Would the family like to have a paid-off home? What will that cost?
• Would the family like to have paid-off college funds? What will that cost?
• Would the surviving spouse like to have grieving and adaptation money? How much per year and for how long?

Answers to these questions might look like:

• Paid-off house: $500K
• Fully-funded college funds: $300K
• Transition funds: $100K per year for 5 years

In this example, the bread-winner would want to carry $1.3M of life insurance until the assumptions change.

Some families might want to min-run the numbers assuming that a surviving spouse will go back to work in order to provide for the family.  This may be true, but none of us knows what the effects of grief will be. Life insurance can buy options for the family to experience an unwanted new reality.

Another technique for estimating life insurance needs is called the “human life value” approach which basically estimates all of the future earnings of a person, then discounts them for the effects of inflation and investment to a lump sum value today.   A challenge of this technique for pilots is that our earnings potential can hockey-stick up after military retirement/separation, but a life insurance quote today won’t account for that.  This forms another reason to revisit insurance requirement assumptions periodically. Not only will SGLI vanish as you start a new career, but you may be eligible for policies through your new employer.  Most airlines offer generous Term Life Insurance.

Remember that the bread-winner isn’t the only one bringing economic value to the household. While every family is different, a common model for a stay-at-home spouse is that s/he performs countless, but immensely valuable functions for education, daily care, transportation, counseling/emotional support, meal preparation, etc.  If a stay-a-home spouse dies, the breadwinner is likely to want to cover things like:

• Childcare and transportation costs
• Increased household maintenance task cost
• Potential counseling and grief management costs

Additionally, the loss of a spouse might cause a survivor to choose a different career trajectory.  This could affect the family’s assumptions for paying off a house, paying for college, and future lifestyle needs.

While it may be harder to quantify the economic value that a stay-at-home spouse brings, there are some left and right limits that you’ll likely encounter.  On the left is FSGLI for $100K.  For a few bucks a month, it’s hard to beat.  On the right is the limit that an insurance company will offer on a non-working spouse.  Usually this is a few hundred thousand dollars.  It’s probably enough to meet the needs address above, but not enough to create a moral hazard.

Finally, some families will want to accomplish different goals, maybe at different life stages with a life insurance payout.   Examples include gifts to family members, charities, and schools.

Philosophy of Life Insurance—Part 2

As I mentioned, I believe we should insure against catastrophes.  For diligent savers, a point will likely come where a death might be an emotional, but not financial catastrophe.  Put another way, when it comes to the assumptions that drove the life insurance purchase, diligent savers will likely become self-insured at some point and no longer need life insurance.

If the house is pretty much paid off, the kids are grown and gone, and the surviving spouse can get by on the proceeds of your well-compounded retirement savings, there may be no financial need for life insurance.  When you look at insurance premium costs, you’ll notice that as you age and get more likely to die, the cost of Term Life Insurance goes from budget-dust to budget-buster per month.

As such, a common technique is to carry Term Life Insurance until the assumptions change enough such that you’re self-insured.  Your final expenses (estate administration, funeral costs, etc.) can come from your piles of savings, not an increasingly-expensive insurance policy.

Hopefully, this is painting the picture that the assumptions driving your insurance needs can change enough that you ought to re-validate them annually.  Annual insurance reviews are good financial hygiene.  Your annual review might reveal that:

• You no longer need as much life insurance
• You now need more life insurance
• More insurance is about to get more expensive due to age or health conditions
• You’re eligible for more insurance because of increased income

Cleared to Rejoin

Life insurance is more ghoulish than sexy to chat about while shooting wrist watches at the bar, but it’s a critical element of your financial life.  We wouldn’t push from the tanker without enough weapons and gas to get the mission done, we shouldn’t push from the driveway without making sure the family can get the mission done without us.   If you haven’t revisited your life insurance assumptions recently, it’s time.  A year after that, it’s time again.  Hopefully, you’re on track to be self-insured one day.  Until then keep life insurance in your cross check for yourself and those you love.  Remember… a little too much, starting a little too soon, and kept for a little too long, is better than the opposites.

Fight’s on!

Winged Wealth Management and Financial Planning LLC (WWMFP) is a registered investment advisor offering advisory services in the State of Florida and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training.

This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal the performance noted in this publication.

The information herein is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Winged Wealth Management and Financial Planning (referred to as “WWMFP”) disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.

All opinions and estimates constitute WWMFP’s judgement as of the date of this communication and are subject to change without notice. WWMFP does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall WWMFP be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the information provided herein, even if WWMFP or a WWMFP authorized representative has been advised of the possibility of such damages. Information contained herein should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.