FEDweek

FEGLI Optional Coverage Gets Costly After Age 50

FEGLI, which is an acronym for Federal Employees’ Group Life Insurance, is an employer-sponsored life insurance program that is offered to Federal employees. FEGLI is a gigantic life insurance program; in fact, it is the largest group life insurance program in the country.

Implemented in 1954, FEGLI was established to provide group life insurance for Federal employees, retirees, and the employees’ family members. The program is currently administered by the OPM (Office of Personnel Management) and is underwritten by MetLife Insurance Company.

FEGLI consists of four separate options with the first option, Basic coverage, being subsidized by the Federal government. The employee is responsible for two-thirds of the Basic coverage premium, and the government picks up the other third. The optional coverages provided are paid 100% by the employee.

All of the coverage under FEGLI is offered using Term Life Insurance, meaning the coverage does not build cash value or earns any interest.

Basic Coverage

The FEGLI Basic coverage is provided automatically unless the employee opts out of the program. The Basic coverage actually consists of three different death benefits. The employee is insured in an amount equal to their annual salary – rounded up to the nearest $1,000 – and then an additional $2,000 added to that amount.

Example: John Smith earns a basic salary of $37,400. Based on his salary rounded up to the nearest $1,000 and then add $2,000, John’s death benefit would be $40,000.

The FEGLI Basic coverage also includes an additional amount of coverage equal to John’s basic death benefit, however, at age 35, this additional coverage is reduced by 10% each year until it is exhausted at age 45.

This is how John’s additional coverage would decrease each year starting at age 35:

 

Notice that the additional coverage of $40,000 is reduced each year until it no longer provides coverage.

The other coverage provided under Basic is Accidental Death & Dismemberment (ADD). The ADD coverage will pay an amount equal to John’s Basic coverage if his death is the result of a covered accident. It will also pay this amount if John loses two of the following in an accident:

If John’s accident results in losing one of the above, his insurance policy would pay one-half of the benefit or $20,000.

FEGLI Optional Coverages

The FEGLI program also offers Optional Coverages but must be paid 100% by the employee.

Option A – Option A allows the employee to purchase an additional $10,000 in insurance coverage. Although the benefit remains level over time, the premium payment increases every five years as the employee ages into a higher premium bracket.

Here is an illustration of how the premiums increase every five years beginning at age 35:

Notice the considerable rate increases the employee experiences when he or she reaches age 50 – and these rates are charged bi-weekly not monthly. These rates for term insurance which builds no cash value are much higher than what the employee could purchase in the private insurance marketplace

FEGLI Option B – FEGLI Option B allow the federal employee to purchase as much as five times the amount of the Basic coverage. It can be select in amounts that are 1, 2, 3, 4, or 5 times the amount of the Basic coverage. Again, this is term life insurance that does not build cash value and the employee is responsible for 100% of the premium.

Just like in Option A, the coverage remains level but the cost of coverage increases every five years once for employees who are 35 or older.

In this example, John Smith has elected a multiple of 5 times his Basic benefit or $200,000. Here is his cost of insurance per pay-period:

Notice how the rates begin to increase dramatically at age 50. At age 50, the employee is paying $20.90 per pay period or $41.80 $45.28 per month. Then, at age 55, the employee’s premium increases to $38.00 per pay period or $82.33 per month. At the rate the premiums are increasing every five years, this insurance will certainly become unaffordable by age 65 and remember, it is building no cash value during the employee’s lifetime.

FEGLI Option C – The FEGLI Option C provides for the employee to purchase term insurance for his spouse and dependent children. If an employee elects Option C, his or her spouse is covered for $5,000 along with all dependent children being covered for $2,500 each. The employee can elect coverage up to five times the initial amount on the spouse – $25,000 – and five times the initial amount on the children – $12,500. The multiple selected for the spouse and the children must be the same.

The children are covered under Option C from birth up to 21-years old as long as they are unmarried. If any child who reaches age 22 is disabled or incapable of self-support, they will be allowed to stay on the policy.

Similar to Option A and Option B, the amount of insurance remains level but the premiums begin to increase when the employee reaches age 35.

Here is a rate chart for Option C with a multiple of five times the initial coverage:

Notice in this example how the rates begin to climb dramatically at age 60 even though it’s very likely that some or all of the children in the household have aged out of their life insurance coverage.

Comparing Life Insurance Costs for FEGLI versus Private Market Insurance at Age 50

Below we have a chart showing the cost of insurance for John Smith based on what his salary would likely be at age 50 which is $96,100. John has elected a multiple of five for his Option B coverage and a multiple of 5 for his Option C coverage:


Using this rate chart showing premium costs over 30 years the total cost to the employee is $314,005.

Certainly, any employee who is diligent about their costs for life insurance is unlikely to pay the premiums listed above, even if they could afford it. There is an alternative, however, the private insurance market is available with rates that are so much more manageable.

The Private Market Alternative to FEGLI at A

If this same employee shopped his life insurance in the private market at age 50, the rates he can receive are substantially lower and the money he would save is significant.


As you can see, the cost of life insurance in the private market is much higher than what FEGLI is offering as group rates. The primary reason for the rate difference is that the FEGLI program must charge higher rates for healthy applicants to make up for the less healthy applicants. In the private market, such is not the case.

The total cost for a $594,000 death benefit in the private market amounts to $67,141. This amounts to a savings of $246,864. Yes, the savings is $246,864.

Guest author Terry Biddle, M.S., is an independent life insurance agent located in Stafford, Virginia. He is reachable at LifePolicyShopper.com