Expert's View

While I was ginning up last week’s article about Option C insurance, I got to thinking about two features of the Federal Employees’ Group Life Insurance program that many employees and retirees don’t know about. First, you can 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.

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Assignment of Benefits

It wasn’t until 1994 that federal employees and retirees were allowed to 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. Since then you have been free to transfer ownership and control of your Basic, Standard Optional (A), and Additional Optional (B) insurance to any individual (or individuals), corporation or trust. But if you do transfer ownership, you can’t cancel your life insurance or make any changes in your beneficiary.

Note: There’s an exception to the rule allowing you the freedom to make an irrevocable assignment. In 1998 the law was changed to bar you from transferring ownership of your life insurance if a court has issued a decree of divorce, annulment or legal separation in which it specifically states that your FEGLI benefits must be paid to someone else.

Living Benefits

You’ve probably seen ads from private businesses that are willing to buy the insurance policies of people who are terminally ill. They purchase a policy at less than its face value, with the amount varying according to how long you are expected to live. In the private sector these are called viatical settlements.   

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Federal employees and retirees couldn’t cash in their life insurance until 1995 when the law was changed to allow anyone who is terminally ill and has a life expectancy of nine months or less to elect what is now called a “living benefit.” In effect, it’s an accelerated payment of Basic life insurance benefits to the policyholder, rather than to a beneficiary or survivor.

Of course, there are some differences between the government’s living benefit program and the private sector’s viatical settlements. For example, a federal employee can only cash in his Basic insurance and then only when he is expected to live no longer than nine months. In the private sector, viatical settlements can be made with individuals whose life expectancy is greater than that.

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You can only elect a living benefit once and that election can’t be reversed. However, if you are an employee, you have the ability to decide how much of your Basic insurance you want to cash in. While retirees can only elect a full living benefit in which they cash in their entire Basic policy, employees may elect a partial living benefit, which 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.

Obviously, if you are eligible for a FEGLI living benefit, the amount you receive will be less than the face value of your policy because you are being paid in advance. However, unlike a viatical settlement, there isn’t any profit margin included in a living benefit. As a result, the amount you receive will usually be greater than that offered by a viatical settlement firm.

Both viatical settlements and living benefits are based on the expectation that you will soon die. If that doesn’t happen, you won’t have to repay the money you received.

 

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