FEGLI as your life insurance
Even the best-laid retirement plans can be thrown off by an unexpected expense. This could include personal care due to a physical or mental impairment or an untimely death. As it comes time for federal employees to retire, they need to look at their situation and reevaluate their insurance needs. They should consider health, long-term care, and life insurance.
The Federal Employee’s Group Life Insurance program, or FEGLI, is an easy option for federal employees. It’s offered by the government, and the premium is automatically deducted from your paycheck. Your coverage increases as your salary increases. If you joined the government in your 20s or 30s, there was additional optional coverage available. It was fairly inexpensive and provided an immediate solution. Overall, FEGLI is competitively priced, but the value depends on many factors.
The main reasons to have life insurance are to cover education expenses, income replacement, mortgages and other debt, along with final burial expenses. As you get closer to retirement, you may have already paid off your mortgage and debt. Your children may be grown, and their education may be paid for. This only leaves income replacement and final expenses.
There’s a fairly easy solution for final expenses. Basic FEGLI coverage. The premium for basic life insurance is mostly covered by the government. The federal employee pays 1/3 of the premium. The rate is 15 cents per $1,000 of coverage biweekly while you are employed. The death benefit is determined by your salary, rounded to the next highest $1000, plus another $2,000.
If you have a salary of $77,500, your FEGLI basic life insurance would cost $12 biweekly. Your beneficiary would receive $80,000 upon your death.
When you retire, your basic FEGLI is based on your final salary and remains at that level and at the same price ($0.325 per $1,000 of coverage per month) until age 65. The default choice when you retire is the 75% reduction, meaning that when you turn 65, or when you retire if that is after age 65, the insurance is free and the death benefit goes down by 2% a month until the coverage goes down by 75%. No matter how long you live, 25% of your death benefit will remain to cover your final expenses.
If you choose to take only a 50% reduction, or no reduction when you retire, you can pay an additional premium during retirement.
If you’re single and do not have to provide for anyone else financially, then it may not be beneficial for you to carry life insurance that would cover income replacement. However, if you’re married, your spouse could lose over half of your Civil Service Retirement System (CSRS) or Federal Employees Retirement System (FERS) annuity, depending on choices you have made. Depending on other factors, like the effect of the Government Pension Offset if you’re retired under CSRS, the receipt of your own earned Social Security retirement, your age, and whether you’re still working, there may be an additional loss of income from Social Security retirement.
FEGLI also offers additional optional life insurance. The Office of Personnel Management has a contract with MetLife to provide this insurance. There are three options. First, the standard option is a $10,000 death benefit. Your age determines your premium. Under this option you pay until you hit age 65 and are retired. Then this option is free. Coverage reduces by 2% per month until the benefit is down to $2,500.
The additional option is multiples of your salary, up to five times your basic pay. Your coverage continues into your retirement with the election of no reduction. Premiums continue and will increase every five years until age 80. You can also choose full reduction. With this choice, premiums are only charged until age 65 and retired. Coverage will then reduce by 2% a month. It will hit zero after 50 months.
The family options provides coverage for your spouse and dependent children. The benefit for your spouse is $5000. Each dependent child is insured for $2,500. Eligible employees are able to choose up to five multiples of this option and continue this coverage into retirement. They may choose no reduction or full reduction.
If you have any questions regarding FEGLI or alternative coverage options, please contact a financial professional.