Federal Employee Group Life Insurance (FEGLI) is one of the many benefits granted to federal employees. But what many employees fail to realize is that the insurance benefits work differently in retirement than they do while employed. Pre-retirees need to understand the different options they have in retirement so they can make the most informed decisions about their future.
But before we dive into that, let’s first let’s look at the different options under FEGLI.
Basic insurance - Your salary rounded up to the next thousand plus $2000. The premium is the same for all employees at $.3467 per $1000 of insurance.
Option A - A flat $10,000 of coverage that increases according to your age until it caps out at age 60 at $13 a month.
Option B - Coverage is up to five multiples of your salary and the premium increases every five years until it caps out at age 80.
Option C - This option is for a spouse and kids. Coverage is $5000 per unit on a spouse and $2500 per unit on kids. The premiums are based on the age of the federal employee and increase every five years until they cap out at age 80 as well.
A federal employee can save thousands of dollars over a 30 year career by getting a term life insurance policy to replace FEGLI. Coverage in retirement, however, is slightly different.
To help you choose the best option, we have to look at (1) the differences in the above coverage options and (2) how coverages and premiums operate in retirement.
Basic – Federal employees have three choices with their basic insurance at retirement, and those choices are:
- 75% reduction - with this option basic insurance starts reducing by 2% a month at age 65 or retirement, whichever is later, until it hits 25%. A retiree has to pay premiums until age 65 or retirement, whichever is later, at which point premiums cease.
- 50% reduction - this option has two different premiums per $1000 of insurance. The coverage reduces by 1% per month until 50% is reached.
- Before age 65 - $1.01 per month
- After age 65 - $.69 per month
- Before age 65 - $2.39 per month
- After age 65 - $2.07 per month
Option A - The amount of coverage is reduced by 2% a month until the final amount of $2500 is hit. This will happen automatically at retirement or age 65, whichever is later.
Option B and C – Employees with B and C at retirement can elect to continue coverage or reduce coverage at the age of 65 (or retirement, whichever is later). A choice can also be made to have some multiples reduce and some multiples remain the same. Premiums will cease once coverage begins to reduce by 2% a month until coverage is fully reduced to zero.
Making the most of FEGLI in retirement
The default election for FEGLI at retirement is the 75% reduction and dropping options B and C. But make sure that option makes the most sense for you and your family before making a choice.
Why it may make sense to keep the full Basic.
Electing to keep coverage into retirement becomes more of a business decision. What I mean by business decision is that it can be a smart move financially to keep 100% of basic coverage. I have seen scenarios where a person is retiring at the age of 79. He has to pay the same premiums of a federal employee that retires at the age of 57. When we ran numbers out to age 90, the return on investment looked very good for his beneficiaries.
I have worked with other people whose health had declined by the time they were retiring. In a situation like this, you would want to look at different life expectancies and the return on investment to your beneficiaries. It may be a very good return on investment if you keep basic at 100%.
Keep in mind that the amount you are paying for is actually 75% of your Basic because the 25% coverage is free after the age of 65 or retirement).
Options B and C
These premiums can become astronomical if you keep coverage in retirement, but if you are in poor health then you may have few other choices that make sense. Another thought is that if you have the coverage when you are nearing retirement, you could keep the insurance in order to get free coverage for 50 months after it starts to reduce.
FEGLI is just one more aspect of the retirement puzzle that we help our clients with. If you would like more info on becoming a client, you can schedule a call here.