Is Federal Employee Group Life Insurance Good Insurance?
I wish more employees asked this question.
It’s true, the Federal Employee Group Life Insurance program doesn’t garner as much thought as it might warrant.
FEGLI is another option in your planning and there are both things to like and not like about the coverage.
In this short article I want to talk through how the program works and how to think about it within your financial plan.
Is FEGLI good insurance?
Is FEGLI expensive?
Is FEGLI a good fit for your family?
First, I would add that FEGLI is neither good nor bad insurance coverage – it’s simply a tool within your financial plan.
How it Works & Available Life Insurance Coverage
FEGLI is Group Term Life Insurance that is available to all federal employees as part of your federal benefits package. New employees are automatically enrolled in the Basic Insurance and you’ll need to waive or opt-out out of coverage if you don’ want the policy.
Basic Insurance is equal to 1x your annual rate of basic pay, rounded up to the next $1,000, plus $2,000.
Employees pay two-thirds of the premium, and your agency pays one-third. There is one exception: The US Postal Service pays the full cost of Basic Insurance for Postal Employees.
Every employee pays the same rate for Basic Insurance, the 25-year-old new hire pays the same premium as a 60-year-old approaching retirement.
You could view it as expensive or cheaper depending on which end of the spectrum you fall. As said directly by OPM: This is because unlike many other unlike many other employer-sponsored life insurance programs, FEGLI coverage can be continued into retirement. The FEGLI retirement benefit is prefunded by premium costs so that after age 65 (or at retirement, if later) some coverage can be continued by retirees at no cost. The cost of this post-65 benefit is included in the FEGLI Basic level premium. The net effect of the level premium and post-65 benefit is that younger enrollees' premiums cover the cost of coverage they currently have, and also pre-funds a portion of the costs related to coverage they will have later in their careers and in retirement. Since the Government contributes a share of the Basic premium, the employee share remains relatively competitive with the cost of private term insurance.
There are also 3 additional coverages you can add on.
Option A – Standard
The standard option is an additional $10,000 death benefit.
Option B – Additional (Multiples)
You can add 1x, 2x, 3x, 4x, or 5x your annual rate of basic pay (after rounding up to the next even $1,000) as additional insurance.
Option C – Family
With family coverage you can add 1x, 2x, 3x, 4x, or 5x multiples of coverage. Each multiple is equal to $5,000 on your spouse and $2,500 for each eligible dependent child. Each multiple works as a unit with both spousal and dependent coverage – you cannot specify one and not the other.
The cost of insurance on each of the additional coverages is based on age-bands,
where the premium it starts out lower for younger employees and progressively gets more expensive as you get older.
Age bands generally last 5 years and start to get pricey as your get into your later 40’s and 50’s. You can find the age band premiums at opm.gov (link).
The Good and Bad
There are some good things about FEGLI.
First of all, as a new hire you have coverage right away with no underwriting, and you can add more coverage, so you have up to 6 times your annual rate of basic pay as a death benefit.
And of course, if you aren’t insurable anymore, having this coverage in place is a very big benefit.
What don’t we like about the policy?
It’s controlled by your employer, so there’s less freedom, flexibility, and control. There are also questions what happens if you leave your job early.
And of course, we don’t like age-banded pricing. Premiums get expensive and we prefer consistency in what we are paying for.
Is it expensive?
I’ll say this, if you have a good health profile you can most likely find something cheaper on the open market if you are just looking for some term life coverage – that of course depending on what you are looking for with amount and length of coverage.
If you are looking or permanent life insurance, that type of policy is almost always going to be more expensive.
Is it a good fit for your family?
First you need to determine how much life insurance your situation calls for. What are your goals?
If income replacement is your primary goal and you are looking to replace 100% of your current income, then you probably need more than 6x your basic pay. That’s because if you are taking a safe or reasonable withdrawal rate from the principal balance, it lends itself to needing more capital.
However, if you are just looking to fund a goal, such as education funding, or to pay off a debt you could likely do that with 5 or 6 times your rate of basic pay.
We also need to consider if term coverage is right for you. If you’re primarily looking to protect your family during the time where you are most susceptible to risk – that 20-25 year period when you are raising a family – term could be a great fit.
If you are looking for estate planning solutions or need something that is going to be in place for the very long-term, something permanent may be a better solution.
The second question is what happens if you leave your job early?
You may have FEGLI coverage in place through work and feel good about it, but something changes and you leave your federal career. Do you want the consistency of having something locked in that you are in control of by owning your own independent policy? Or are you comfortable with some uncertainty that comes with the group coverage – for the most part you are able to continue the employer policy but with considerable expense.
And as mentioned, if you’re not insurable FEGLI remains a great option.
Major Pitfall to Avoid:
Please, please, please, if you are considering making any changes do not cancel any coverage until you have a new policy in place – bought, paid for, and in force.
You might feel everything is going smoothly with the new application process and so you cancel your existing policy to save a few bucks. Then something unexpected comes up in the underwriting process and the insurer decides you are not a good risk and declines to offer the insurance. Now you don’t have any coverage and the prospect of getting another policy is quite uncertain and may be very difficult.
I hope you’ve found this information on FEGLI helpful. I would encourage you to take the time to review all of your insurance coverage so that you can make the best decisions for your personal circumstances.
I also publish a biweekly newsletter with insights into topics like this and more. If you’d like to join the list, please subscribe here.
Don’t be afraid to ask questions. I’m here to help.
-Justin
*The content is developed from sources believed to be providing accurate information.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational
