FEDweek

Life Insurance in Retirement

When you retire you’ll have to make some decisions about life and health insurance coverage, assuming that you are enrolled in one or both of these programs. This time around, I’ll focus on the rules governing the Federal Employees’ Group Life Insurance (FEGLI) program.

Basic insurance

When you were first hired you were automatically covered by Basic insurance, unless you waived that coverage. The amount of that coverage is equal to your base salary rounded up to the next $1,000 plus $2,000. As your salary increases so does the amount of your coverage. The government pays two-thirds of the premiums and you pay the other third.

When you retire, you’ll be offered three choices: the 75 percent reduction in your Basic insurance, a 50 percent reduction, or no reduction. If you chose the 75 percent reduction, you will continue to pay the same premiums for that insurance that you did while an employee, until age 65. The value of your Basic insurance then will decline at a rate of 2 percent per month until it reaches 25 percent of its face value. You won’t pay any premiums for that insurance after age 65.

If you choose the 50 percent reduction, it will reduced by 1 percent per month starting at age 65 until it reaches 50 percent of its face value. For that additional benefit, you will pay higher premiums.

If you chose no reduction, you’ll pay even higher premiums.

Option A – Standard Insurance

If you are covered by Basic insurance, you can buy an additional $10,000 of coverage at your own expense. While the premium rates are modest for younger employees, they increase over time. Premium deductions will stop at the end of the month in which you reach your 65th birthday. At that point, your Option A insurance will automatically decline by 2 percent per month until it reaches 25 percent of its face value.

Option B – Additional

Option B allows you to elect an amount equal to one, two, three, four or five times your annual basic pay, after rounding it up to the next $1,000. At retirement, you’ll be offered the opportunity to retain the coverage you had as an employee. If you do, you’ll continue to pay the full cost of that coverage, which will continue to rise as you grow older. You can reduce that cost by reducing the number of multiples or by allowing the dollar value of that coverage to decline beginning at age 65 at a rate of 2 percent per month for 50 months until it reaches zero.

Option C – Family

Option C allows you to provide coverage for your spouse and eligible dependent children under one policy at your own expense. Just as with Option B, you can elect up to five multiples of coverage, with each multiple equaling $5,000 for your spouse and $2,500 for each of your children. The premium cost per multiple is a function of your age. That coverage is free after age 65 when it will automatically decline at a rate of 2 percent per month for 50 months until it reaches zero.

Next time, I’ll focus on health insurance in retirement.