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Posted 7/11/2007 Printable Fact Sheet

Servicemembers' Group Life Insurance (SGLI) Fact Sheet

Servicemembers' Group Life Insurance (SGLI) is group term life insurance for members of the armed forces. Active duty members are automatically insured for $400,000, unless they opt out in writing. SGLI is a better choice than many other insurance plans because it pays out in situations, such as death by war or suicide, where other plans do not. Additionally, SGLI protects you while you're on active duty, and for the first 120 days after you separate.

When it comes to their SGLI benefits, many military members simply sign the form and never think about it again. That's a big mistake. Think about the following issues, and update your SGLI so that this important benefit goes where you want and need it to go.

The military member has the absolute right to choose the beneficiary to receive the SGLI funds in the event of the member's death. Any person, or legal entity (such as a charity), can be a beneficiary. All you have to do is indicate your preference on an appropriate VA Form (VA Form SGLV-8286). However, you have the option to place no one as your beneficiary, or to indicate "by law" in the place where you would normally list a beneficiary. If you choose either of those options, then SGLI proceeds are paid according to the SGLI statute. 

According to the statute, the proceeds will first go to your spouse, but if you don't have a spouse, then to your surviving children in equal shares. If you don't have any children, the proceeds will go to your parents. If you don't have any parents, the proceeds will go to the executor of your estate. Finally, if you don't have a will that names an executor, the proceeds will go to your next of kin according to state law.

However, it's a bad idea to write in "by law," or to leave the SGLI designation blank. In fact, the Army, Navy and Marines no longer even allow their members to use the "by law" designation. If you indicate "by law," the money may not go to the person you really want it to. For example, the SGLI definition for "parents" is limited to the father/mother of a legitimate child, adopted child, and mother of an illegitimate child. The father of an illegitimate child is considered the parent also, but only if this fact has been acknowledged in a signed writing prior to death, or there exists a judicial decree to that effect or proof of paternity has been established from official records.

The 1991 federal case, Lanier v. Traub, is a good example of the pitfalls of the "by law" designation. In that case, the military member, Joe, had been raised by his stepfather. Joe indicated that his SGLI proceeds should be paid "by law." When he died, all the money went to Joe's biological father and mother, who had nothing to do with his upbringing. It's safe to say that Joe would rather his stepfather, who had loved and nurtured him, receive the money. However, "by law," his stepfather was not a potential beneficiary.

It is also very important that you keep your designation current, especially if you have gotten divorced and/or remarried. In yet another case, Ridgeway v. Ridgeway, which went all the way to the United States Supreme Court, the military member designated his spouse on the SGLI election form. However, when he was subsequently divorced and remarried, he never changed the beneficiary designation. Thus, when the military member died, the SGLI proceeds went to his ex-wife instead of his current wife.

It is possible to designate a minor as your SGLI beneficiary. However, SGLI proceeds cannot be paid directly to a minor, except for a minor spouse. Therefore, you need to set up an appropriate instrument, such as a trust or UGMA/UTMA account, which will hold the money for the child. If you simply 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. 

Since the appointment of a guardian takes place after the military member's death, the member has no input as to the person selected to act for the minor. Additionally, certain bond, court and legal expenses will have to be paid out of the SGLI proceeds initially as well as during the time that the designated beneficiary remains a minor. Finally, all SGLI proceeds will usually have to be paid to the minor at age 18, regardless of the minor's maturity, or lack thereof.

One way to avoid the above expenses is to set up what is commonly known as an UGMA/UTMA account. To do this, you need to select a custodian who is willing to hold the money for the child. There is no requirement for court involvement and as a result, the military member, and not the court, determines who will act in the minor's best interest with regard to the use of SGLI proceeds. 

Additionally, the UGMA/UTMA custodian can use the SGLI proceeds as he or she determines is appropriate for the benefit of the child during the period of time the child remains a minor. There will also be no delay in the distribution of SGLI proceeds to the designated UGMA/UTMA custodian. You can also designate a trustee under a trust established in a will to receive the money and hold it on behalf of a beneficiary. However, before completing the SGLV-8286 form you need to have a will already prepared, the will must contain a trust, and the will must be executed. 

The advantages of creating a trust are that the trustee can use the SGLI proceeds for the benefit of the minor for a period of time, and in the manner specified in the will. Additionally, direct distribution of SGLI proceeds may be delayed beyond the 18th birthday of the minor to ensure that the child is old enough to handle the money.

In sum, there are several points you need to keep in mind:

First, avoid the "by law" designation entirely. It may not leave the money to the person you really want it to go to. 

Second, list specific individuals as your beneficiaries. 

Third, if you get divorced, make sure that you update your form to remove the ex-spouse as beneficiary. 

Finally, if you want to designate a minor as the beneficiary, make sure that the appropriate instrument is set up to receive the money on behalf of the minor.

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