Reg Jones Expert's View

For federal employees and compensationers, life insurance used to be a pretty straightforward business. You took out insurance and when you died, whoever you designated as your beneficiary got the proceeds. However, today there are two relatively new features of the Federal Employees Group Life Insurance (FEGLI) program that need to be considered.

First is the right to irrevocably assign your life insurance benefits to another person or persons. Second is the right to cash in your Basic insurance when you have been diagnosed as terminally ill. By law, these options are mutually exclusive. If you elect one, you can’t elect the other.

Assignment of Benefits

Before October 3, 1994, federal employees, retirees and compensationers who wanted 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 couldn’t do it. Only those with private life insurance could do that.

Under current law, you are free to 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 stated that your FEGLI benefits must be paid to someone else. Of course, if you are able to make an irrevocable transfer, you won’t be able to cancel your life insurance or make any future changes in your beneficiary.

Living Benefits

For as long as I can recall, there have been companies out there who were willing to buy the insurance policies of people who are terminally ill. These “viatical settlement” outfits will purchase a policy at less than its face value. How much less depends on your life expectancy and their profit margin.

As of July 26, 1995, the law provides that anyone terminally ill with 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 viatical settlements in a number of ways. The two most important ones are that only Basic insurance can be cashed in, and that viatical settlements may be made with individuals whose life expectancy is greater than nine months.

A full living benefit involves cashing in the entire Basic policy. A partial living benefit involves cashing in a portion of the policy, which can be done in multiples of $1,000. With a full living benefit, premium deductions cease. With a partial benefit, they are reduced. Retirees and compensationers may elect only full living benefits.

You may elect a living benefit only once, and that election may not be retracted. Obviously, taking a full living benefit will leave your survivors with no Basic insurance benefit. A partial benefit will leave them with the remainder. However, if you are an employee, it’s important for you to understand that the dollar value of the remaining amount will be frozen. It will never change, even if your salary goes up.

Viatical settlements and living benefits are predicated on your early death. So, what happens if you don’t die as soon as expected or even recover from your terminal condition? The answer is nothing. There is no obligation for you to repay any of the money you received.

If you are eligible for a FEGLI living benefit, the amount you receive will be reduced by an amount representing interest lost to the life insurance fund because of the early payment of benefits. Since there is no profit margin included in a living benefit, that amount will generally be higher than that offered by a viatical settlement.