Life Insurance Planning: It's your responsibility

  • Published
  • By Cara Johnson
  • Air Force Legal Operations Agency
It's important to plan now for the distribution of your life insurance and, if applicable, the payment of the death gratuity. Expressing your wishes as to the beneficiaries of your SGLI and death gratuities is easier than ever, but it starts with you. Your legal assistance attorney can help advise you on wording your designation of beneficiaries, but we cannot create nonwill trusts. If you would like to create a testamentary trust (a trust created in your will for the benefit of a minor), your legal assistance attorney can assist you with a single, simple trust.

Servicemembers' Group Life Insurance
SGLI is an important benefit for active duty servicemembers. It is a "non-probate" asset, which means that in the event of your death, your SGLI will pay according to the terms of the policy, not through your will. The terms of the policy dictate to whom the money passes, and you designate a beneficiary or beneficiaries by completing a form SGLV 8286 (, and turning it in to your servicing military personnel flight. The present value of SGLI is $400,000.

Designating your beneficiary
SGLI provides you with a great deal of flexibility in designating beneficiaries, as you can designate more than one principal beneficiary by indicating the shares that each beneficiary should be paid- For example, 50 percent to your spouse, 10 percent to your mother and 40 percent to your three siblings. Be aware, though, that if you split your SGLI in this way, and your mother predeceases you, her 10 percent will go to increase the shares of the remaining beneficiaries at this level, resulting in 55 percent to your spouse, and 45 percent to your three siblings. If, instead, you want to have your mother's 10 percent pass to your father, you must specifically make this clear by writing on the DD Form 8286 a statement such as "10 percent to my mother, but if she should predecease me then to my father."

You may also designate a "contingent" beneficiary or beneficiaries: This is a person who would receive the proceeds of your life insurance in the event that the principal beneficiary or beneficiaries die before you. Again, be aware that no secondary beneficiary will receive proceeds if any of the primary beneficiaries are still living at the time of your death.

If you do not designate a beneficiary, the proceeds will be paid in the following order: First to your surviving spouse, if any, then to any children, then to your parents, and finally to a duly appointed executor or administrator of the estate.

Designation of a minor as a beneficiary: Trusts and the UGMA/UTMA
If you designate a minor child as a beneficiary of your SGLI, the proceeds cannot be paid directly to the minor, except for a minor spouse. If you designate a minor as your SGLI beneficiary and take no further action, the SGLI proceeds will not be released and used for the benefit of a minor until an adult acting on behalf of the minor petitions a court to be appointed the guardian for the SGLI proceeds. This is a time-consuming and potentially expensive process. There are two ways to transfer your SGLI to a minor. First, you can create a trust for the benefit of the minor- either in your will or as a regular trust- and then fill out the SGLV-8286 form designating the trust as the beneficiary of the life insurance. In order to accomplish this, you must already have an executed will that contains trust language for the benefit of the minor child or children. Simply naming a trust as the beneficiary on your DD Form 8286 does not set up a trust: You must create the trust separately and then make sure the DD Form 8286 funds the trust.

Alternatively, you could set up a Uniform Gifts to Minors Account (UGMA) or Uniform Transfers To Minors Account -- sometimes referred to as the 'poor man's trust fund'. This is a simple vehicle, essentially an inflexible savings account, requiring no court involvement, that allows the insurance to pay directly into an account for the minor's benefit without court involvement, but there are several drawbacks.

To set up a UGMA, you must go to a broker, bank or mutual fund manager, and tell them that you wish to open a UGMA or UTMA. You must have the minor's Social Security Number and be ready to designate a "custodian" for the account. The custodian is the adult who will be responsible for managing the minor's money. It is always a good idea to designate not only a primary, but a secondary and even tertiary custodian, because the whole point of this exercise is to avoid probate of the assets, and if your UGMA custodian were to die, all this work would be for nothing.

The UGMA is a simple and elegant vehicle for avoiding hassle in the initial payout of the SGLI benefit, but it is not perfect. First, when the minor reaches 18, the money becomes his or hers to use as they see fit. Over 95 percent of UGMA's are cashed in by the age of 25 - that's why stock brokers refer to these as "Spring Break Accounts." Some states, like New York, Pennsylvania, Maryland and Virginia, allow the UGMA to extend to 21 years of age, but not all states will allow this. A trust is a better option if you feel that your child will not be able to handle a $400,000 bank account at 18 years of age, because trusts can be set to pay out at a later age.

Another potentially expensive issue is that a UGMA can decrease a child's chances for financial aid, because the money in the UGMA belongs to the minor (despite the fact that they cannot access it until they turn 18). Colleges and scholarships look to parents to use approximately 6 percent of their assets toward the child's education.

However, they generally require 35 percent of the student's assets be considered before assessing need. Here, if a minor child has $400,000 or more in a UGMA account, their financial aid package will reflect that asset, whereas if the money were held in a trust and the child is not yet able to access the money, that money may not impact their financial aid profile.

How is SGLI paid to my beneficiary?
SGLI proceeds may be paid in one lump sum or in 36 equal installments. You may specify one of these two options on the form SGLV 8286, and if you do not specify, the SGLI will be paid in one lump sum. Payments of SGLI benefits are not subject to claims of creditors of the insured.

The Death Gratuity: making sure the right people get paid
The death gratuity, like SGLI, is a significant asset on your death, payable to survivors of those who died in a designated combat operation or combat zone, or where the death occurred while training for combat or performing hazardous duty on or after Oct. 7, 2001 and before Sept. 1, 2005. The death gratuity is currently $100,000.

Designating your beneficiary 
As of July  2008, Airmen were able to select one or more individuals to receive the death gratuity, which can be designated in 10 percent increments to anyone the Airman elects- it is no longer restricted to a spouse, child or blood relative. For example, an Airman could choose to leave 20 percent to a cousin, 10 percent to a best friend and the remaining 70 percent to a spouse for a total of 100 percent. Previously, the Death Gratuity was automatically distributed to the surviving spouse and then to any children or grandchildren. Only when these classes of people failed to take was the Airman able to designate a beneficiary.

Also in July 2008, AFPC updated all vREDs to reflect a "By law" designation. The term "by law" means that 100 percent of the death gratuity is paid in the following order of precedence: First, to the surviving spouse. If no surviving spouse, then to surviving child(ren) in equal amounts. If no children, then to the descendents of any deceased children in equal amounts. If no lineal descendants, then to surviving parent(s) of the service member in equal amounts. If no surviving parents, then to the person appointed executor or administrator of the service member's estate. This may not be a person who would be a beneficiary under your will. For example, some individuals might name a law firm or other entity as their executor to handle the probate of their estate. In this situation, the you would probably not wish the death gratuity to pass to the firm handling your probate, but this will occur if you do not update your beneficiary designation. If the Airman has not appointed an executor or administrator, the death gratuity passes to the Airman's other next of kin entitled under the law(s) of domicile at the time of death.

Airmen who would like to designate a specific beneficiary or multiple beneficiaries by name must access the vMPF and do two things: First, you must enter the beneficiaries' contact information in either the next-of kin or the interested parties block, and then make a by-name election in the DG block. You are responsible for keeping all beneficiary information up to date. If you are married, you now have the option of leaving less than 100 percent of the death gratuity to your spouse. However, the law now requires that your spouse be notified in writing when you have chosen to give less than 100 percent to them. The letter will be sent from the AFPC Contact Center whenever such an election occurs and will not disclose any percentages, or identify any additional beneficiaries.

Designating a minor as your beneficiary
The same issues relating to payment to a minor under SGLI apply to the death gratuity: A trust or UGMA should be set up if you wish to pass your death gratuity to a minor child.