The Federal Employee Group Life Insurance Handbook is very informative. It's also long - over 200 pages long! This article boils down the high level basics of the FEGLI Program and then leaves you with three thoughts as you consider how to leverage this program to help secure your family's financial future.
Keep in mind that there is ALWAYS a ton of nuance to in any government program. In order to keep this article manageable(ish), I’m only addressing the general details for FERS employees. Check the FEGLI Handbook and the OPM website for more details (or drop me an email with your questions)
30,000 Foot Overview
FEGLI is group life insurance. That means it does not accumulate cash value and it does not follow you if you separate from Federal service (more on this later). You can carry FEGLI into retirement (more on this later).
The FEGLI program has two parts:
Basic Insurance - You are automatically enrolled in this coverage unless you waive it. Basic Insurance equals your annual salary rounded up to the next $1,000 plus $2000. For example, if your annual salary is $75,500, Basic Insurance would be $78,000 (round up to $76,000+$2,000). Minimum coverage is $10,000 (so if your annual salary is $5,000 you would still have $10,000 of coverage)
If you are under age 45 and you have Basic Insurance, then you also have an Extra Benefit included (age dependent)
Optional Insurance - There are three versions of Optional Insurance. You must have Basic Insurance in order to add Optional Insurance.
Option A - Adds $10,000 to your Basic Insurance amount
Option B - You can elect 1,2,3,4, or 5 times your annual salary (rounded up to the next $1,000)
Option C - Family coverage (up to $25,000 for spouse; up to $12,500 for each child)
During employment: For most Federal employees, the government covers ⅓ of the cost of Basic Insurance. The employee covers ⅔ of the cost of Basic Insurance and the full cost any Optional Insurance elected. The government covers 100% of the cost for US Postal Service Employees. There is no cost for the Extra Benefit.
At Retirement: It depends (see below)
Basic Facts about Basic Insurance (and the Extra Benefit) during Employment
You are automatically enrolled in Basic Insurance upon entering the Federal workforce. You must waive coverage if you do not want it. This is a very important decision since it can be difficult to opt back in for coverage later. There are no routinely scheduled open seasons for FEGLI. You may opt in for coverage within 60 days of a qualifying event (marriage; divorce; death of a spouse; birth/adoption of a child). Or, you may opt in if you provide satisfactory evidence of insurability (at your own expense). In this case, acceptance is not guaranteed.
If you are under age 45, your Basic Insurance also includes an Extra Benefit. The Extra Benefit depends on your age. If you are 35 or younger, it is equal to your Basic Insurance amount. At age 36 the Extra Benefit decreases by 10% per year until the benefit stops at age 45. In a nutshell, if you are 35 or younger you have twice as much insurance as the Basic Insurance amount. If you are 40 you have 1.5 times the Basic Insurance amount.
The current employee cost of Basic Insurance is $0.15 per $1000 of coverage biweekly. There is no additional cost for the Extra Benefit. (NOTE: The cost changes from time to time. Check opm.gov for most recent rates)
Optional Insurance during Employment
In order to elect any of the Optional Insurance options, you must be covered by Basic Insurance. You must proactively elect the type of Optional Insurance you want within 60 days of becoming eligible for Basic Insurance. If you do not elect Optional Insurance, then you will not be enrolled. If you waive Basic Insurance at any time, you are also cancelling your Optional Insurance. However, waiving or reducing Optional Insurance has no effect on your Basic Insurance benefit.
As noted above there are three versions of Optional Insurance.
Option A is simply an addition of $10,000 of coverage. The cost is based on age. While it is relatively cheap ($0.20 per $1,000 bi weekly) for employees age 39 and under, it can get expensive as you get older ($1.80 per $1,000 bi-weekly when age 55-59).
Option B provides the opportunity to add coverage in multiples of your annual pay. You can choose 1, 2, 3, 4, or 5 times your annual pay rounded up to the next $1,000. Like Option A, the cost is based on your age.
Option C is coverage for your family. You can elect to cover your spouse for up to $25,000 in increments of $5,000. You can elect to cover each of your children for up to $12,500 in $2,500 increments. Like Option A and B, the cost for Option C is also age based (the Federal employee’s age; not the spouse or children’s ages).
FEGLI if you separate from Federal Service
If you decide to leave the Federal government before being eligible for an immediate annuity pension, you will be offered the opportunity to convert your coverage to an individual policy. You must make this election within 31 days of receiving the conversion notice.
If you have family coverage (Option C), conversion from FEGLI results in individual policies for each family member covered (ie. a policy for your spouse and another policy for your child).
Note that there are additional rules/ considerations depending on the reason you are separating from Federal service (ie. to enter military service). Details are beyond scope for this article.
FEGLI when you retire from Federal Service
If you are eligible for an immediate retirement annuity, you have the option to continue your FEGLI coverages as long as you have been insured under FEGLI for at least 5 years prior to retirement, you are enrolled in FEGLI on the date of retirement, and you have not already converted to an individual policy.
At retirement you will need to consider the following:
You must choose whether you want your benefit to remain the same or reduce beginning at age 65. Your options are No Reduction, reduce by 50%, or reduce by 75%. If you retire before age 65 your coverage remains the same until age 65 regardless of election. The cost of insurance changes depending on whether you choose to reduce the amount of Basic Insurance coverage beginning at age 65. See chart below for a summary.
The only choice you have for Option A is whether you maintain it or cancel it. If you maintain Option A, the benefit remains the same ($10,000) until age 65. At age 65 the benefit begins to reduce by 2% per month until $2,500 remains. The cost for Option A is age based until age 65 and then is free when the benefit begins reducing.
Options B and C
You can choose to maintain the same election you had while employed, or you can reduce the multiple of coverage. Then, you also can choose whether you want this benefit to begin reducing at age 65 or if you want to maintain the benefit with no reduction. If you choose no reduction, your cost is age based just as before. If you choose full reduction, then at age 65 the benefit begins decreasing by 2% per month until no benefit remains. The cost is age based until age 65 when reductions begin. The benefit is free when it begins reducing.
Retiring after age 65?
Your coverages remain the same until you retire. Then your choices are the same as above.
FEGLI and Your Financial Plan
As promised, there’s a lot of information and many decision points. Where do you begin as you consider the choices you're facing?
What does your family need if you pass away?
First, you need to determine what your family needs to cover your final expenses and get them through a very emotionally (and, maybe, financially) difficult time.
You can either use a multiple of your salary as a guess (plenty of “rules of thumb” out there) or you can add up all the things you want to have covered if you were to pass away. For example, you might want to cover the cost of your final expenses (funeral, etc) plus pay off your mortgage/ other debt, plus cover your spouse’s salary until your children are school aged (so he/she can stay home with the kids), plus cover your children’s educations, etc. You must factor in inflation for all of these expenses. A knowledgeable, fiduciary financial planner can be helpful.
Consider Your Other Death Benefits
Once you know what your family might need, determine all sources of funding. Will your family receive benefits from Social Security? If so, how much and for how long? Take a look at your statement on SSA.GOV for more information. Then be sure you understand when Social Security will pay benefits.
Also, keep in mind the other death benefits available to Federal employees. There is a death benefit if you die while still employed. And, you have the option to add a Survivor Benefit to your pension when you retire.
Details for all of these funding sources are beyond scope for this article but do your research before you make your FEGLI elections. Again, a knowledgeable financial planner can provide valuable insight to support your decisions.
Consider Other Insurance Policies
Generally, the Basic Insurance benefit is competitively priced, particularly while employed (the government is paying 1/3rd of the cost after all!). However, the age-based costs for the Optional Insurance Options may become less cost competitive as you get older.
If you are in good health, it may be worthwhile to request quotes for a private term life insurance policy to determine whether it makes more sense for you to use private insurance rather than FEGLI. Keep in mind that life insurance rates increase faster as you get older. Also, keep in mind that there are a wide variety of life insurance providers and products so shop around, compare comparable products (apples to apples), and seek advice from a knowledgeable, fiduciary financial planner.
If you are not in good health or have a medical history of certain conditions, private insurance may not be a great option. In which case, Optional Insurance may be a very important benefit for your family.
FEGLI fills the gap
Once you calculate your insurance need, determine sources of other fundings, and determine whether it's more cost effective to maintain private life insurance, the remaining gap can be filled by FEGLI.
FEGLI is an important benefit that can help to secure your family’s financial future in the event the unthinkable happens. The decisions are complex, time sensitive and must be carefully considered as part of your overall financial situation.