The U.S. government launched the Federal Employees’ Group Live Insurance Program (FEGLI) during the mid-1950s to provide group life insurance for federal employees and their families.
FEGLI can be an affordable and effective tool to help protect your family in the face of unexpected events. However, there are gaps. Because of this, certain Feds may find that supplementing their FEGLI coverage with private term life insurance can help ensure that resources are available when you or your family might need them most.
FEGLI at a Glance
First, let’s take a look at FEGLI.
As a federal employee, you automatically qualify for FEGLI’s Basic Insurance Amount (BIA). The BIA is based on your annual basic pay rate, rounded to the nearest $1,000 plus $2,000.
For example, if your annual salary is $65,800:
To fund the insurance, you pay two-thirds of the premium, with the federal government chipping in the rest.
You also have access to three types of optional insurance under FEGLI (for which you assume the payment):
FEGLI vs. Private Life Insurance
FEGLI and private term life insurance both aim to provide for your immediate family in case of long-term illness, accident or death. The differences between the two are listed below.
Premiums
FEGLI. Because your earnings dictate FEGLI premiums, they increase when your salary does. Furthermore, as group life insurance, FEGLI’s premiums are based on ALL government employees’ average age and health levels, making premiums more expensive for younger than average (or healthier than average) employees.
Private Term Life Insurance. Private term life insurance premiums remain stable for the duration of the policy. Your rates won’t go up, no matter your age or salary.
Customization
FEGLI. Coverage is based on your salary and elected multiples rather than your situation. Furthermore, FEGLI doesn’t provide cash value.
Private term life insurance. Private term life insurance offers a myriad of options to suit your unique situation and financial context. Carefully evaluate your needs when selecting insurance so that you don’t over-insure. Life insurance is meant to replace household income that may be lost if you are not working, or in the case of home-based spouses, to cover costs that would arise if they were not around to do all of the unpaid work they do. (Seriously, have you seen the cost of childcare these days?)
Conversion flexibility
FEGLI. With the exception of an extremely rare FEGLI open season, the last of which was in 2004, you can only change your FEGLI policy when you leave your government job. In that situation, you have the option to use the FEGLI conversion to transition into a private life insurance policy if you so choose. If you do not choose to convert your FEGLI policy in the event of a termination of federal service, you lose that coverage. Retirees from the federal government who are receiving a pension can choose to continue their FEGLI coverage throughout their retirement, of course.
Private term life insurance. Private term life insurance typically allows for extension past the original term expiration date, or for conversion into a permanent whole life policy if/when your circumstances change. Of course, changes to your policy will be reflected in your premium in most cases.
Retirement considerations
FEGLI. As we mentioned earlier, if you’re considering keeping your FEGLI insurance after retirement, it’s possible. When completing good old SF 2801 in preparation for retirement, you can elect to keep your full FEGLI coverage, or select a 50% or 75% reduction. If you decide on no reduction, you will maintain the same basic coverage when you retire and pay a larger premium that increases as you age. If you select a reduction, your basic coverage will begin reducing by 2% monthly once you attain age 65 until it reaches 50% or the pre-reduction amount (or 25% of the pre-reduction amount, in the case of a 75% reduction).
Private term life insurance. Depending on the insurer and the policy itself, it’s quite possible that your premiums (and death benefit) will remain the same whether you’re working or retired. Furthermore, you can often adapt policies to cover other issues, like long-term care or income flow.
Worth Considering: FEGLI + Private Insurance
As a federal government employee, FEGLI is an attractive option for covering basic life insurance needs for you and your family. In most cases, Basic + Option A coverage under FEGLI (with no multiples) can provide a strong foundation. For younger than average or healthier than average Feds, however, it could be worth pricing out supplemental life insurance coverage via a private term life insurance policy, particularly if you are looking to cover just your high income-earning years, or the period of time during which your kids are underage and might need additional financial support in the event of your demise.
Financial advisors with Serving Those Who Serve have the knowledge and experience to guide you through the many available options, both under FEGLI and not, to protect you and your family. To learn more, log on to www.stwserve.com or email [email protected].
The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we 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. **
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