Did you know that the Federal Employee Group Life Insurance (FEGLI) is the largest group insurance program in the world? In fact, there are more than four million people covered by this insurance policy. This includes federal employees, retirees, and their family members.
It does not come as a surprise that the federal government provides solid life insurance benefits to its employees. However, some people are wondering whether this policy provides enough coverage after retirement.
Read on to learn all about FEGLI in retirement. Explore how FEGLI life insurance works and whether it is the right fit for you in retirement.
What Is FEGLI?
Before diving into whether it makes sense to carry into retirement, it is important to define the program. There are various components to this life insurance plan. Continue reading for a brief explanation of each component:
Basic
New employees are automatically enrolled in the basic life insurance coverage. The basic policy provides each employee with coverage.
Basic coverage costs 16 cents for every $1000 of coverage. This premium is deducted from your biweekly paycheck. The cost of coverage does not increase as you get older.
The amount of coverage is equal to your salary. The coverage amount is rounded up to the next $1,000 and an additional $2,000 is then rolled in.
Option A
Electing Option A gives you an additional $10,000 in coverage. It is only for the employee and your premium does increase as you get older.
Option A costs 20 cents for every $1,000 of coverage. While this is not a huge amount of money, it is very affordable. Most employees elect for Option A because it only costs about $2 per paycheck.
Option B
Option B is where the policyholder can significantly increase their amount of coverage. Here, you can increase coverage by multiples of your salary.
The cost does increase as you get older. For the youngest policyholders, Option B costs 2 cents per $1,000 of coverage.
By far, Option B is the most impactful election. For comparison, Option A only provides $10,000 of coverage at a cost of 20 cents per $1,000.
Option B is 10% of the cost and allows you to purchase life insurance up to 5x your annual salary. If you earn $100,000 per year, you can acquire up to $500,000 in coverage.
Option C
Option C is the final election for federal employees to consider. This option is designed to provide coverage in the event your spouse or child passes away. Covered children need to be unmarried and under the age of 22 to qualify.
Like Option B, this election allows you to purchase coverage in multiples up to five. You can acquire coverage for your spouse in increments of $5,000 up to $25,000.
Children are covered in increments of $2,500. This means the maximum coverage amount is $12,500 for children.
The cost of this coverage is 22 cents per multiple. The vast majority of retirees are not covering children under 22, meaning this benefit is no longer necessary.
What Happens When You Retire?
Upon retirement, there are some major changes to your benefits. There are some elections to make that impact your benefits’ calculation.
For example, you can retain the same premium for basic coverage. However, this results in a 75% reduction in the benefit.
Consider that your salary was $100,000 at retirement. To calculate your benefit, add $2,000 to the salary and then multiply by 0.25. Your life insurance benefit is now $25,500 as opposed to $102,000 while you were still working.
You can keep the $102,000 coverage under the basic policy. However, this means an increased biweekly premium. You pay nearly $2.60 per $1,000 of coverage until age 65. After your 65th birthday, the rate drops down to $2.25 per $1,000.
There is a 50% reduction option as well. This option costs almost $1.10 per $1,000 of coverage.
The cost of Option A and its $10,000 coverage also increase. For example, retirees aged 60 through 64 now pay $13 per month.
The good news is that premiums for Option A stop when you turn 65 years old. Unfortunately, the coverage amount starts to decline at this time. Each month, coverage declines by 2% until it reaches 25%.
Option B is where the premium costs start to soar. At age 54, you are paying almost 22 cents per $1,000 worth of coverage. Ten years later, the biweekly cost is more than 4X higher.
When you hit 70, premiums rise to nearly $1.89 per $1,000 of coverage. The peak is reached in your 80s when premiums rise to more than $6 per $1,000.
Consider that you elected for the 5X multiple on a $100,000 salary. At 54 years old, this equates to a biweekly premium of $110. For $220 per month, you can secure your family a $500,000 payout.
At age 69, the premium is $1.04 per $1,000. Now the cost is over $1,000 per month to retain your benefit.
Obviously, the price tag is astronomical as you reach your 50s and 60s. This is where retirees need to decide whether to pare back coverage or find another plan. At any age private life insurance will be more cost effective if your healthy.
Is It Worth Keeping in Retirement?
Clearly, we made a case that costs increase as you get older. This comes as no surprise and is the case with most life insurance plans.
However, you may find it unnecessary to carry such a large life insurance policy as you get older. It is likely that your children are now independent or you have significant savings in the bank.
At this point, you may find it necessary to dial your coverage amount back. This is typical and a professional can help you determine your life insurance needs as circumstances evolve.
Summarizing FEGLI in Retirement
Now, you know the ins and outs of the federal life insurance program. FEGLI insurance is a solid plan for existing younger employees.
However, you are sure to notice costs increasing as you get older. At some point, the higher premiums may no longer match your budget or coverage needs. If you want to do an analysis on your FEGLI in retirement, contact us today to speak with a licensed professional.
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