Summary
Deciding whether to keep, reduce, or cancel FEGLI after retirement depends on your life insurance needs, coverage options, and potential costs. Learn how Basic and Optional FEGLI coverage works in retirement, how it compares with private life insurance, and what to consider before changing your coverage. FEBA offers complimentary consultations to help federal employees better understand their benefits and life insurance options.
Table of Contents
What is FEGLI?
In this article, we will be discussing the topic of maximizing retirement benefits, specifically focusing on the Federal Employees’ Group Life Insurance (FEGLI) program. We will address common questions and concerns regarding FEGLI coverage, including the cost, eligibility, and the importance of life insurance in retirement planning. We will also touch on the option to reduce or cancel FEGLI coverage and explore alternative life insurance options for federal employees. It is important to understand that FEGLI is primarily meant to give you life insurance coverage while you are working. While there are options to keep all of it into retirement, there is no cost-effective way to keep any considerable amount after your employment ends. So, let’s dive in and explore the world of FEGLI and retirement benefits!
Setting Up a Consultation
Before we get into the details, let’s address a couple of administrative points. If you’re interested in setting up a call with us to discuss your specific situation, you may be wondering about the cost. Rest assured, there is no cost for our consultation services for Federal Employees. We do not charge you for our time, whether you become a client or not. Our compensation comes from the financial institutions, insurance companies, or legal institutions that provide us with the services we recommend. So, don’t let the fear of cost be a hesitation in moving forward with a consultation.
Understanding the Need for Life Insurance
Now, let’s address a common question raised by Debbie, a Federal Employee, during one of our live trainings. As a single, independent individual with no children, she wonders why she would need a life insurance policy. It’s important to remember that life insurance is a personal decision and there is no one-size-fits-all answer. However, there are a few factors to consider.
Firstly, if you have any debts, such as a mortgage or car loans, a life insurance policy can help eliminate those debts so that no one else has to worry about them. Additionally, if you have dependents or beneficiaries who rely on your income, a life insurance policy can provide financial support for them in the event of your passing. This includes elderly family members.
However, if you don’t have any debts and no one depends on your income, then a life insurance policy may not be a necessity for you. It’s important to assess your individual circumstances and make a decision based on your specific needs.
Changes to FEGLI Coverage
Your main opportunity to sign up for FEGLI is at the time you are hired. While there are FEGLI open seasons, there is no prescribed frequency of these and there is currently not any scheduled. The other way you will have an opportunity to increase FEGLI coverage is in the case of a qualifying life event, such as the birth or adoption of a child or getting married. You can reduce or cancel FEGLI at any time.
Understanding Basic FEGLI
Basic FEGLI is determined by your salary. So this insurance amount changes most years. The equation that they use is taking your adjusted basic pay, rounding it up to the next thousand and adding $2,000 more. Example: $100,256 salary would equal $103,000 in basic FEGLI coverage. While you work it is very affordable and you can keep 25% at no cost in retirement when 65 or older. But, to try to keep any more than the free amount becomes very expensive.
FEGLI Option A – Standard Coverage
Option A is a flat $10,000 additional policy. The cost on this does increase as you get older, but caps out at $6 per paycheck at age 60. You are allowed to keep 25% of this policy at no charge when retired and 65 or older.
FEGLI Option B – Additional Coverage & Costs
Option B allows federal employees to carry up to 5 additional multiples of their salary in the form of life insurance. To determine the amount of the multiples, simply round the adjusted basic pay up to the next thousand. So our example from before would be $100,256 equals $101,000 per multiple, up to 5 times. This is priced very well when employees are younger, but it increases in cost every 5 years.
The increases are very small and mostly not noticeable until someone gets into their late 50’s and beyond. Then it starts to have large increases and more than doubles in cost at some ages. The earlier you understand this, the better you can adjust for it. If life insurance is going to be something you use for estate planning later in life and into retirement, you will want to secure individual, private sector life insurance when you are young enough and healthy enough to get really good rates.
The problem is that most federal employees don’t start to think about this until the cost doubles on their Option B overnight or when they get close to retiring and start to pay attention to this kind of thing. Then the cost of individual policies are going to be higher and harder to secure because of their age, and possibly not even qualify due to previous or existing health conditions. When you retire, you can choose to keep any and all of your Option B multiples, but be ready for some really expensive deductions if you do.
FEGLI Option C – Family Coverage
Option C provides family life insurance. It can cover spouses and dependents that are younger than 22. You can have up to 5 multiples. Each multiple will provide $5,000 for a spouse and $2,500 for a dependent. If you have all 5 multiples then you would have $25,000 in coverage for the spouse and $12,500 for dependents.
With option C, the federal employee will be the beneficiary if the spouse or a dependent passes away. Option C is pretty affordable. It does increase in price every 5 years but does not have any major price hikes and remains pretty competitive in its pricing as compared to private sector final expense policies. You can keep any and all multiples into retirement or cancel them.
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FEGLI vs. Private Life Insurance
There are 2 main types of Private Sector life insurance. Term and Whole life. Term insurance is the most affordable coverage you can get. It is meant to give you low-cost coverage for a period of time (10, 15, 20 years, etc). The goal with Term is to grow out of needing it before the term ends. Some examples would be to pay off the mortgage before the end of the term or have finished putting the kids through college, or even have saved enough assets to no longer need it.
Whole life is meant to be permanent coverage for your entire life. The cost will be higher on these types of plans but there isn’t an end date of coverage like term. Whole life insurance can also be used as a savings vehicle and build cash value. There are very sophisticated strategies to use whole life to grow tax-advantaged assets.
If you are looking at replacing FEGLI coverage with private sector coverage, it is vitally important to make sure your new policy is in force BEFORE you cancel or reduce your FEGLI for 2 reasons. 1: you don’t want to leave any period of time where you are not covered. 2: once you cancel or reduce your coverage with FEGLI, you’re probably never getting it back.
Planning for FEGLI in Retirement
In conclusion, understanding and maximizing retirement benefits, such as the Federal Employees’ Group Life Insurance (FEGLI) program, is crucial for federal employees. While there are limitations to enrolling in or making changes to FEGLI coverage, it’s important to explore your options and consider your individual circumstances.
Life insurance is a personal decision, and it’s essential to assess your needs and consult with a financial representative to make informed choices. Remember, our consultation services are free, and we are here to provide education and guidance throughout your retirement planning journey. Life insurance plays a crucial role in an overall financial plan. It provides financial protection for your loved ones and helps eliminate any outstanding debts you may have after you are gone.
Frequently Asked Questions
Only specific parts.
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Basic Coverage: If you choose the “75% Reduction” option, the premium becomes free starting the month after you turn 65 (or retire, whichever is later), and coverage reduces to 25% of its original value.
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Option B & C: These are not free if you elect to keep the full coverage. You will continue paying premiums that increase significantly as you age.
FEGLI Option B premiums are based on age brackets. While affordable when you are young, the rates increase drastically starting at age 55 and often double between age 60 and 65. Many retirees find Option B becomes unaffordable just when they need it most. We recommend scheduling a complimentary consultation with FEBA to compare private market rates before these price hikes hit you.
For most healthy retirees, keeping Option B is not cost-effective because the premiums continue to rise for life. However, do not cancel it until you have an approved private life insurance policy in force. FEBA can help you secure a private policy to replace your Option B, often saving you significant money while locking in a level rate.
No. You cannot enroll in FEGLI or increase your coverage after you have separated from service. You can only reduce or cancel existing coverage. This is why we urge federal employees to undergo a pre-retirement benefit review with FEBA while they are still working, so we can identify any coverage gaps before the window closes.
These terms refer to what happens to your policy value after age 65.
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75% Reduction: Your coverage reduces by 2% per month until it hits 25% of the original amount. (Premium is usually free after 65).
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No Reduction: Your coverage remains at 100% of its face value, but you must pay a significantly higher premium for life.
Yes, if you elect to keep it. However, like Option B, the premiums for Option C will increase as you (the retiree) age. Since Option C provides a relatively small payout (up to $25,000), many retirees find that a private “final expense” policy offers better long-term value.
