Financial Frontlines®

New Law Change Increases Insurance Coverage for Veterans

The VA just announced that theyhave increased the limits for coverage under the Veterans Group Life Insurance (VGLI)  program. The VA press release is below. This could be a good opportunity for those veterans who need and use the VA as their life insurance provider. Keep in mind though that VGLI is term insurance, and premiums increase dramatically as we age. Many veterans determine that they can’t keep their life insurance in force later in life because the premiums are too expensive. How will you provide for your loved ones if you can no longer afford your life insurance premiums?

Take a look at the chart of VGLI premiums from the VA before you decide whether to increse your VGLI coverage.

Here is the link to the premium tables for VGLI: http://insurance.va.gov/sglisite/vgli/VGLI%20rates.htm 

Those are the monthly rates. Download the chart for a good view, broken down by monthly, quarterly, semi-annual and annual rates, of how much this insurance costs. Take a look at the costs at age 70 and beyond. Will you be able to pay those rates in later life? Obviously, you’ll need more than VGLI to complete your financial planning.  

With all life insurance, it pays to shop around and do your homework.

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WASHINGTON – Some Veterans covered under the Veterans Group Life Insurance program (VGLI) now have the opportunity to increase their coverage to the current maximum coverage under the Servicemembers’ Group Life Insurance (SGLI) program.

“Currently, 70 percent of the Veterans covered under VGLI are under age 60, have less than $400,000 of coverage, and will greatly benefit from this law change,” said Allison A. Hickey, Department of Veterans Affairs under secretary for benefits.

Under the Veterans’ Benefits Act of 2010, enacted on Oct. 13, 2010, Veterans can increase their coverage by $25,000 at each five-year anniversary date of their policy to the current legislated maximum SGLI coverage, presently, $400,000.
To date, approximately 21 percent of eligible Veterans have taken advantage of this opportunity, resulting in nearly $113 million of new coverage being issued.

The VGLI program allows newly discharged Veterans to convert their SGLI coverage they had while in the service to a civilian program. Before enactment of this law, Veterans could not have more VGLI than the amount of SGLI they had at the time of separation from service.

For example, those who got out of the service prior to Sept. 1, 2005, when the maximum SGLI coverage was $250,000, were limited to $250,000 in VGLI coverage.

Now on their first five-year anniversary, these Veterans can elect to increase their coverage to $275,000. On their next five-year anniversary, they can increase the coverage to $300,000, and so forth.
The additional coverage can be issued regardless of the Veteran’s health. To be eligible to purchase this additional coverage, the Veteran must:

• Have active VGLI coverage,
• Have less than the current legislated maximum coverage of $400,000,
• Request the additional coverage during the 120-day period prior to each five-year anniversary date, and
• Be less than 60 years of age on the five-year anniversary date of his or her coverage.

Eligible Veterans are notified of this opportunity a week before the start of the 120-day period prior to their anniversary date, and twice more before the actual anniversary date.

For more information about VA’s Insurance Program or other VA benefits, go to www.va.gov or call 1-800-827-1000. Veterans are also encouraged to visit VA’s web portal eBenefits – Insurance.
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Are you a person who planned ahead and prepared legal documents such as a durable power of attorney for health care, a living will, and a power of attorney for your other personal/financial affairs? Well, if you have contact with any VA services, you would probably be well served by filling out the VA’s specific legal documents to make things really official.

You see, the VA is federal and your legal documents are based in state law. That can make things confusing depending on where you signed your state documents, what your state of residence was at the time of signature, your state of residence when you are patient, or where your treatment as a patient is administered. We military retirees are a mobile group.

The VA Advanced Directive for Durable Power of Attorney for Health Care and a Living Will is VA form 10-0137. The VA power of attorney forms to appoint a Veteran Service Office or an individual as your representative to handle a VA claim or appeal are VA form 21-22 and VA form 21-22a respectively. All are available on-line, just Google the form numbers or go by your VA office or Veteran Service Office (VSO). Find a local VSO at http://www.va.gov/statedva.htm to ask specific questions.

Some of you may have decided to use your post 9/11 GI Bill for your children’s education.  Some of you may have also set up a 529 Plan to help pay for their college education.   If you have both in place, you have the possibility to pay for your children’s college at a reduced price and potentially with tax advantaged funds.  BUT…the tax ramifications are not straight forward and you’ll want to think this one through before you “pull the trigger”.

First of all,  Veterans Administration (VA) benefits are always tax-free.  You will not pay taxes on the amount the VA pays for tuition and fees, the monthly Basic Allowance for Housing (BAH) or the book allowance.  Ever.  So that part is pretty straight forward.

But using your 529 Plan assets is a little more complicated.  Distributions from a 529 Plan are tax-free IF they are used for qualified educations expenses.  But, qualified education expenses must first be reduced by any tax-free education assistance received.  So, if you use 529 Fund assets for expenses already covered by the GI Bill you may owe taxes and a potential penalty.  Here are some specific examples:

GI Bill covers full tuition and fees (in state) and student has no other qualified expenses.

In this case, since the GI Bill covers full tuition, any withdrawal from a 529 Plan would be subject to tax and penalty.  The tax would be on the amount of the distribution that is classified as “earnings” and the penalty is an additional 10% tax on the earnings.

GI Bill covers a portion of the tuition and fees (out-of-state or private school) and student has no other qualified expenses

In this case, since there is a difference between the tuition paid and the amount covered by the GI Bill, then an amount equal to that difference can be withdrawn tax-free.  Any amount over the excess would be subject to tax and penalty.

GI Bill covers all or a portion of tuition and fees and student has room and board expenses

This situation is a little less clear.  IRS Pub 570 states that you must reduce the total qualified education expenses by tax-free educational assistance received.  This amount is called the adjusted qualified education expenses.  To calculate it the amount of GI Bill received to pay for tuition and fees will be deducted from tuition and fees paid only.  Also, in this case, since room and board are included as qualified expenses then I believe the BAH received should be used to reduce the qualified education expenses which in this case include room and board.  But…the IRS Pub isn’t clear.  Like in situation one and two above, if the amount withdrawn exceeds the adjusted qualified expenses, the excess is subject to tax and penalty.  This is one where you will want to talk to your personal tax advisor and get a determination based upon your specific situation.

So based on these restrictions what happens when you can’t use all the money in the 529 Plan for qualified education expenses.  There are a couple of “outs”  First, you can roll the funds over to another child, grandchild, spouse and certain other qualified people.  Also, again in my interpretation, since you could not use all the funds due to VA benefits, you can withdraw the funds without penalty.  You’ll still owe taxes on the earnings but you won’t pay the 10% penalty.

So there you have it.  529 Plans and the GI Bill do work together, but the tax consequences are a little complicated.

In a previous post , I explained how concurrent receipt works and tried to dispel some of the common misconceptions.  The application of concurrent receipt for a Guard/Reserve (G/R) member who is medically retired prior to age 60 is another source of confusion.

When tallying your years of service for retirement, G/R members can have active duty years of service and drilling years of service.  The drilling years are combined with the active duty years to provide the total years of service; ‘good’ years of service vested for retirement eligibility (= or >20 years) and for retirement pay at age 60.  If medically retired, the medical retirement orders separately indicate your vested active duty and your total years of service.  Distinguishing between these two types of years of service is critical when a person is medically retired for determining eligibility for concurrent receipt.

A medical retirement is categorized as an ‘active duty’ retirement.  That’s why you don’t have to wait until age 60 for your retired pay; you get paid retired pay immediately.  Being an active duty retirement, you only get credit for your active duty time served; not your total time served.  However, for pay purposes only, your total years of service are used.

Here’s where the confusion and problems develop.  As a retired active duty member, which a medical retirement is, it takes 20 or more years of active duty service before you are eligible to receive CRDP.  Or, you’re eligible for CRDP if you have 20(+) years of total service and you are age 60 with a G/R retirement.  If you are G/R and medically retired with less than 20 years active duty service, you don’t qualify for CRDP.

The rub…“but I do have more than 20 years service!”  You have more than 20 years service vested for a G/R retirement.  Your 20+ years are a combination of drilling years and active duty years.  Active duty years count for active duty retirement and total years count for a G/R retirement.  The G/R retirement doesn’t pay retired pay until age 60 and that’s when CRDP eligibility begins.

Let’s say you’re medically retired with less than 20 years active duty time but more than 20 years total time served.  You received your retirement Notice of Eligibility letter prior to your medical retirement.  You may want to do some math to see if at age 60 you are better off with a G/R retirement since you will be CRDP qualified under a G/R retirement.  Check with your G/R Retirement office for details.

On the other hand, you can qualify for CRSC IF your disabilities are the result of combat and you have less than 20 years of active duty time served.  The combat nature of your disabilities is also noted on the medical retirement orders.

Some of you retired or separated from the Service soon after implementation of the Post 9-11 GI Bill in August 2009.  You probably didn’t realize at the time (who did?) that you had to transfer the educational benefit to dependents BEFORE you actually separated from the Service.

Maybe others of you didn’t find out about the “…before you separate policy…” until after separation.  Of course, the longer the time period after the P911GIB implementation, the less likely it is that you couldn’t have known about the policy.

If you didn’t transfer benefits but intended to, you have an option to try and fight for your transfer benefit.  The Services control the transfer benefit, not the VA.  If you were still in the Service after the Aug 2009 Post 9-11 GI Bill start date, you were eligible to transfer the benefit up until your retirement or separation date.

Your option is the Board for Correction of Military Records (BCMR) program.  Each Service has a BCMR program.  This is not an automatic approval process.  You can be turned down under this program.  If, and this is a big IF, the Board decides in your favor, your transfer benefit can be reinstated.

You have to apply to the BCMR for consideration.  The burden is on you to prove the Service neglected to provide proper management or counsel that denied you benefits you intended to exercise or tried to exercise.  Saying something was “unfair” won’t cut it.  You have to show evidence that you were wronged by the Service per laws, regs, policies, directives, deficient base-level program, etc.  Why didn’t you apply prior to you leaving the Service?  How is this the Service’s problem and not a personal problem?

Think you have a case?  Put together your BCMR package and see what happens.  See the appropriate web site for information on the process:

Army:  http://arba.army.pentagon.mil/

Navy/Marines:  http://www.donhq.navy.mil/bcnr/bcnr.htm

Air Force:  http://www.afpc.af.mil/afveteraninformation/afbcmr.asp

Post 9-11 GI Bill law: http://www.law.cornell.edu/uscode/html/uscode38/usc_sup_01_38_10_III_20_33.html