Federal Employees: Choices and Applying for Life Insurance Coverage

This column will present the choices federal employees have with respect to addressing their life insurance needs.

This is the second of four FEDZONE columns during the month of September in conjunction with September being designated as “Life Insurance Awareness” month. This column will present the choices federal employees have with respect to addressing their life insurance needs.

Federal employees have two choices with respect to addressing their life insurance needs. The first choice is to enroll in the Federal Employees Group Life Insurance (FEGLI) program. Full-time and part-time permanent employees are automatically enrolled in the FEGLI program (in particular, the “Basic Insurance Amount or BIA, discussed below) when they are initially hired. The FEGLI program is an employer-sponsored group life insurance program. The federal government is the sponsor of FEGLI. There are several advantages to being enrolled in a group -sponsored life insurance plan such as FEGLI, including:

1. • Guaranteed issue: A federal employee who is automatically enrolled in FEGLI when initially hired or who fills out an application to enroll in FEGLI is guaranteed life insurance with no underwriting
2. • Same premiums. Employee-paid premiums for the FEGLI BIA (BIA is equal to an employee’s current SF 50 salary and rounded up to the next $1,000 plus $2,000)) are the same (that is, the same cost per $1,000 of coverage) for all employees. This is true no matter the age of the employee, the employee’s SF 50 salary, or the employee’s health status. The employee’s agency pays a portion of the premiums.

But there are several disadvantages to being enrolled in FEGLI, including:

• When a federal employee leaves federal service, he or she cannot retain FEGLI life insurance coverage
• An employee who retires from federal service and is eligible and who elects to retain full FEGLI BIA life insurance coverage will pay 700 to 800 percent more in FEGLI life insurance premiums during retirement compared to what he or she was paying as an active employee.
• FEGLI optional coverages (Option A – Standard; Option B – Multiple of Salary; and Option C – Family coverage) get increasingly more costly in the form of higher premiums as an employee gets older and premiums continue to increase in retirement if the employee elects to continue these optional coverages in retirement

The other choice that a federal employee has with respect to their life insurance needs is to apply for an individual life insurance policy offered by a private life insurance company. An employee must apply and complete the company’s life insurance application. The employee will have to furnish evidence of insurability which includes the insurance company checking the employee’s medical records and, in some cases, having to pass a medical exam. There is no guarantee that the applicant will be approved and if approved, what the applicant will pay in life insurance premiums.  The factors that can affect individual life insurance premiums include:

• Age. Perhaps the most important factor because life expectancy is the biggest determinant of risk for the life insurance company
• Gender. Since women on average live longer than men, they generally pay lower insurance premiums compared to males of the same age and for the same face amount of life insurance
• Smoking. An individual who smokes is statistically a higher risk for many health issues that could shorten life and therefore increase risk-based premiums
• Health issues. The purpose of medical exams that are required for many life insurance applicants is to screen for health conditions such as heart disease, diabetes, cancer and related metrics that can indicate the possibilities of shorter longevity and risk to the insurance company
• Lifestyle. Dangerous lifestyles can result in the insured paying more in life insurance premiums
• Family medical history. Those applicants for life insurance who have evidence of a major medical conditions (such as heart disease) in their immediate family (parents or siblings) statistically are at a higher risk of incurring these conditions, and
• Driving record. A history of moving violations or drunk driving can dramatically increase the cost of life insurance premiums.

Some Recommendations on How to Purchase Individual Life Insurance

A life insurance policy can constitute a significant expense and commitment on behalf of the life insurance policyowner. It is therefore important for an applicant for life insurance to do proper due diligence to ensure that the insurance company selected has a solid track record and is financially strong. Because the life insurance policy’s designated beneficiaries may not receive any death benefit for several decades into the future, it is important for life insurance applicants to choose insurance companies that have a sound financial record and are rated accordingly.

An individual is encouraged to seek the advice of a licensed life/health insurance broker in order to purchase a life insurance policy. A life insurance broker is not tied to just one insurance company with whom the broker will sell life insurance, as are most life insurance agents. A life insurance broker can arrange for an individual living in any state to apply for a life insurance policy in which the broker is licensed to sell life insurance to residents of that state. Also, the life insurance company for which the broker is recommending the individual to apply for life insurance has received permission (from the State Insurance Commission) to sell life insurance policies in that state.

In choosing a competent life insurance broker, a federal employee looking to purchase an individual life insurance policy is advised to contact their State Insurance Commission for a list of licensed life/health insurance brokers in their state. A competent and professional broker will ideally provide a comparison of available life insurance policies available to be sold in the individual’s state of residence. The licensed broker ideally will be familiar with costs and features with the FEGLI program in order to do a fair comparison of costs with life insurance policies equivalent to FEGLI. A competent life insurance broker will also make sure that the applicant is applying for the appropriate amount of life insurance and, if applying for a term life insurance policy, that the term (number of years) is appropriate given the long-term financial needs of the insured.

Finally, the following are some questions that a federal employee seeking to purchase an individual life insurance policy should ask their life insurance broker:

• 1. If the employee cannot obtain a preferred rating from the insurance company, can the employee be offered another type of life insurance, perhaps with a higher premium?
• 2. Should the employee replace FEGLI coverage or just parts of FEGLI, such as optional coverages?
• 3. What happens if a disability causes the employee to be unable to pay the premiums. Is there a “waiver of premium” rider?
• 4. What are some other policy riders or provisions that the employee should consider as part of their life insurance?
• 5. When should an employee replace any other existing individual life insurance coverage, if at all?

Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be dependable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those, Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Federal Employees: Applying for Life Insurance