There are two features of the Federal Employees Group Life Insurance (FEGLI) program about which you are probably unaware. First, you can now irrevocably assign your life insurance benefits to another person or persons. Second, you can cash in your Basic insurance when you have been diagnosed as being terminally ill. However, by law, these options are mutually exclusive. If you elect one, you can’t elect the other.
Assignment of Benefits
Before October 3, 1994, only those with private life insurance could make an irrevocable assignment of their FEGLI insurance as part of an estate planning effort, to obtain cash before their death, or for other valid reasons. Under current law, you can transfer ownership and control of your Basic, Standard Optional, and Additional Optional insurance to any individual(s), corporation or irrevocable trust – with one exception. Under a 1998 law, you can’t transfer ownership if a court has issued a decree of divorce, annulment or legal separation and specifically stated that your FEGLI benefits must be paid to someone else. On the other hand, if you can make an irrevocable transfer, you won’t be able to cancel your life insurance or make any changes in your beneficiary.
There are companies that are willing to buy the insurance policies of people who are terminally ill. Such companies will purchase a policy at less than its face value. How much less depends on your life expectancy. These are called viatical settlements.
As of July 26, 1995, the law provides that anyone who is terminally ill and has a life expectancy of nine months or less may elect what is called a “living benefit.” It’s an accelerated payment of Basic life insurance benefits to the policyholder, rather than to a beneficiary or survivor.
The government’s living benefit provision differs from the private sector viatical settlements in several ways. Here are the two most important ones. First, only Basic insurance can be cashed in. Second, viatical settlements may be made with individuals whose life expectancy is greater than nine months.
A living benefit may be elected only once, and that election can not be reversed. So, if you elect a full living benefit, you will be cashing in your entire Basic policy. If you elect a partial living benefit, you will only be cashing in a portion of that policy. That can be done in multiples of $1,000. With a full living benefit, you would no longer pay any premiums. With a partial benefit, your premiums would be reduced. Note: Retirees and compensationers may only elect full living benefits.
Clearly, if you elect a full living benefit, your survivors will not be eligible for any Basic insurance benefit. A partial benefit will leave them with the remainder of your policy. However, you need to understand that the dollar value of the remaining amount will be frozen. It will never change, even if your salary goes up.
If you are eligible for a FEGLI living benefit, the amount you receive will be less than the face value of your policy. That reduction represents the interest lost to the life insurance fund because they paid you ahead of schedule. Fortunately, there is no profit margin included in a living benefit; therefore, the amount you receive will usually be higher than that offered by a viatical settlement firm.
Like viatical settlements, living benefits are based on the expectation that you will shortly die. But that doesn’t always happen. Some people who have been diagnosed as terminally ill don’t die as soon as expected or even recover from their terminal condition. If you are one of the lucky ones and have elected a living benefit, the good news is that you won’t have to repay any of the money you received.