Deciding whether or not to keep your FEGLI coverage in retirement requires careful consideration of your financial goals and personal circumstances. Image: Teacher Photo/Shutterstock.com
By: By Lacie Harmon, The Federal Benefits GroupAs you near retirement, you may be wondering whether or not to keep some or all of your Federal Employees’ Group Life Insurance (FEGLI) coverage. While many soon-to-be retirees decide to drop much of their coverage at retirement time rather than facing higher premiums, there are certain aspects of the coverage that are well worth considering hanging onto, depending on your age and health. What do I mean by this? Let’s break down the four parts of FEGLI and look at why keeping some of them in retirement can be an attractive option.
Basic
Basic FEGLI is coverage on the employee equal to annual salary rounded up to the nearest thousand, with a $2,000 bonus on top. For example, if an employee earns $74,500, their coverage is $77,000 ($74,500 rounded up to the nearest thousand + $2,000). Importantly, Basic FEGLI coverage is permanent life insurance, meaning that as long as you pay the monthly premium, which is deducted from your monthly pension once you’ve retired, you’re covered for life. And, here’s where the potential financial benefit comes in: assuming you’re in average health and have reached age 60, the premium is competitive with permanent, non-cash value insurance on the private market. More competitive still are the premiums when reducing your coverage by 50% or 75%, which are the two other options available on retirement Form SF 2818.
Option A
Option A is a flat, $10,000 death benefit that also includes additional benefits in the event of accidental death or dismemberment. Coverage costs $13/mth. once you’ve turned 60 and then once you’re retired, automatically reduces to $2,500 of coverage when you reach age 65. For this reason, if you’re in your 60s, particularly if you’re 63 or 64, it’s worth considering paying the premium until you qualify for $2,500 of no-cost, permanent coverage at age 65. In fact, it may surprise you to learn that if you’re 65 or older and you elect to drop Part A on your retirement application, OPM sends you a letter asking if you’re sure of this choice since you’re turning down free coverage.
Option B
Option B is 5-year, renewable term life coverage that provides coverage of up to five multiples of your salary, automatically renewing at a higher cost every 5 years. Those 5-year price hikes make it the most expensive part of FEGLI over time and prohibitively expensive for most in retirement. A retiree with a final salary of roughly $60,000 and 5 multiples of Option B, or $300,000 of coverage, faces a premium of $261/month when he’s 60, but when he turns 65, that premium rises to $312/month, and when he turns 70, it rises again to $558/month. By the time he’s 80, he’s looking at a whopping $1,872/mth. For this reason, unless you’re in poor health, it’s worth looking at replacing some or all of this coverage at retirement time, or even better, when you’re in your 50s, as this is when the prices on the private market begin to be competitive. Of course, if you’re in poor health or have a high risk of developing serious medical conditions, then the “bird in the hand” can be better than the one in the bush, since life insurance carriers may decline to cover you.
Option C
Option C provides coverage on your spouse and/or dependent children under age 22. Like Option B, this coverage is available in multiples of one to five, with each multiple being $5,000 on a spouse (for a maximum coverage of $25,000) and $2,500 on children (for a maximum coverage of $12,500). This option is essentially permanent insurance until the death of the federal employee/annuitant, at which time the family members covered under this option can convert to private insurance. It’s impossible to compare apples to apples with an individual permanent policy for several reasons, including that it covers multiple people but because it’s a relatively small death benefit, enough for a burial in many places, all things being equal, the prices are competitive, and the value of already having coverage on your spouse and kids is a major consideration.
A few important final thoughts: First, regardless of how you choose to handle your FEGLI coverage on your retirement application, your elections do not go into effect until you reach age 65. Until then, you are covered at the same levels you were the day before you retired unless, after you’ve retired, you write a letter to OPM requesting otherwise. Second, although OPM attempts to keep FEGLI premiums stable, they are subject to change. This is a relatively rare occurrence, and the last time they did this, prices went slightly up and in some areas/age bands of coverage and slightly down in others, but it’s something to take into account. And lastly, you can always lower your FEGLI coverage in retirement, but you can rarely, if ever, increase it so when in doubt, it’s a good idea to hold onto it until you have clarity.
Overall, deciding whether or not to keep your FEGLI coverage in retirement requires careful consideration of your financial goals and personal circumstances. By understanding the four parts of FEGLI and evaluating your needs, you can make a well-informed decision that meets your coverage requirements and provides you with financial security and peace of mind.
Lacie Harmon is a Federal Benefits and Retirement Specialist who helps federal employees understand and maximize their benefits, both during employment and retirement years. She teaches regularly at federal agencies and offers monthly federal retirement webinars. Past classes taught include for clients such as the FAA and GAO, as well as union locals of the APWU and NALC.
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