Getting the Best Deal on Life Insurance
By Jeff Spencer
Jeff Spencer developed his passion in helping others with financial planning at a very young age while enlisted in the Air Force, stationed in England working on aircraft as a crew chief. Over the years, Jeff has continued with his passion and recognizes how money can become a powerful tool that should be used to deliver safety and protection in our lives.
For Basic FEGLI coverage, federal employees must pay two-thirds of the premium rate while employers in the private sector typically cover the cost of their employee’s basic coverage. Once covered by FEGLI, everyone pays the same premium no matter their health status, which differs from the individual coverage where premiums usually depend on the health of the person seeking coverage. Because of this, FEGLI could appear relatively more expensive, especially if healthier federal employees compared it with plans that they could potentially receive from private individual coverage.
Basic FEGLI and Option B (the option that covers your life for one to five multiples of your annual basic salary) automatically increases in value as your salary increases. This is the case regardless of pre-existing health conditions and age. The option B and C (which covers the lives of your eligible children and spouse) can also be increased in the event of a birth, marriage, divorce, adoption of a child or the death of a family member, without proof of insurability. One way that Option C can be used is to cover an individual who may not be eligible for life insurance on the private market because of poor health or age. Option C has a major drawback though since no more than $25, 000 in life insurance is provided on your spouse.
Due to Optional FEGLI’s increasing premiums, it’s wise to revisit your life insurance needs after every five years (when the premium adjusts). Insurance policies that were necessary at the time you got married or began a family may not be relevant once you are close to retirement, or your children become adults, or your mortgage is finally paid off. Also, don’t forget to update your beneficiary designation!
Bear in mind that you are covered by FEGLI regardless of your hobbies or occupation, and beneficiaries typically get paid no matter what the cause or place of death was. Unlike many other private sectors, FEGLI also provides coverage for retirees.
Survivor Annuity vs. FEGLI
Upon death, FEGLI provides a tax-free, lump sum benefit to your beneficiary. However, this should not be considered a substitute for the survivor annuity election (under either the Federal Employees Retirement System or the Civil Service Retirement System). For example, let’s say a federal employee would receive a $20,000 benefit (payable from FERS basic retirement). If that employee were to stick to the FERS spousal survivor benefit, then the retirement could be reduced by $2, 000 per year, or 10 percent, thus, leaving a benefit worth $18, 000 (as a reduced taxable retirement income). When the maximum survivor benefit is chosen, then the surviving spouse will be provided with a lifetime annuity of 50 percent of the unreduced retirement benefit, which also includes future adjustments for inflation.
If that same federal employee decides to keep FEGLI Option B coverage up until retirement and beyond, and has held this coverage for five years before retirement, then if that employee dies before their spouse, the proceeds of the insurance could be used by the surviving spouse. Also, it can serve as a replacement for the income from Wanda’s FERS retirement benefit. Let’s say Wanda’s five multiples of Option B coverage worth is $320, 000 ($64, 000 x 5). The coverage costs $138.67 per month before Wanda turns 60, at age 60, the premium would have doubled to about $304.86 a month. When she clocks 65, the cost would also have reached $374.40 monthly, and until she is 80, this will steadily rise every five years.
Always bear in mind that the money used for the settlement of these premiums are derived after deducting tax and the surviving spouse is entitled to a minimum of survivor annuity to continue coverage under the Federal Employees Health Benefits Program. Despite the fact that a surviving spouse may require more income than the spousal FERS or CSRS, if you die first, the survivor annuity has a provision of replacing your retirement benefit, in later years, FEGLI can become prohibitory to cost and is not a perfect substitute.
In conclusion, these are some of the things you should remember about FEGLI:
- FEGLI provides accidental death and dismemberment insurance for employees as part of its basic coverage at no additional cost.
- If you cancel FEGLI, there is no refund of premiums.
- If you are diagnosed with a terminal illness, FEGLI includes a “living benefit,” which is payable from your basic life insurance before your death.
- It is group term life insurance. It does not build up cash value.
- Although your beneficiary will be paid irrespective of the cause or location of your death, if your beneficiary causes your death intentionally there is however an exception.
- You can’t take a loan out against your FEGLI insurance.
Contact Jeff Spencer
Heartland Retirement Group
Email: [email protected]