Insurance Gap

he Federal Employees Group Life Insurance (FEGLI) program always has been government's No. 2 insurance program, behind the Federal Employees Health Benefits Program (FEHBP), in terms of the attention it draws. In the view of FEGLI experts in and outside government, the program lately has fallen to No. 3 in popularity, behind a benefit that won't exist for at least another two years-long-term care. While Congress has passed a measure that would allow federal employees to purchase long-term care insurance at a discounted rate and President Clinton has signed it, the program won't take effect until 2002.

Even as No. 2, FEGLI never really tried to draw attention to itself. In contrast with FEHBP's annual participant open seasons, FEGLI has had only three since 1985. And in contrast with FEHBP's annual competition among carriers, FEGLI hasn't had competition since Dwight D. Eisenhower was President. Experts say employees tend to sign up for FEGLI when first hired and then largely forget about it. "I don't think anybody joins the federal workforce to gain access to the FEGLI program," says a senior Office of Personnel Management official. "I don't know that life insurance is high on people's radar screens in terms of it being an important benefit. I think it's an important piece of the compensation package but I don't know that a lot of employees focus on life insurance per se." Nor has Congress focused much on FEGLI. Apart from House hearings last year, virtually no attention has been given to the program since a 1998 law increased certain optional benefits. Instead, legislators have concentrated on creating long-term care coverage that would begin in October 2002 at the earliest. That issue has commanded much of OPM's time as well. The net result is a notable lack of attention for a program considered to be the largest, most stable employer-sponsored life insurance program in the country, covering federal and postal employees, retirees and their family members. Yet below the surface, questions are stirring regarding whether FEGLI has been so unchanging that it has fallen behind prevailing benefit practices elsewhere and whether the program wouldn't benefit from a dose of the eager competition taking place in the insurance market.

How FEGLI Stacks Up

FEGLI offers term insurance coverage consisting of a basic plan and three forms of optional insurance. The basic plan, for which the executive branch pays a third of each enrollee's premiums (the U.S. Postal Service pays the entire amount for its employees), provides coverage of an employee's basic pay rounded to the next $1,000 plus $2,000. Its cost to enrollees is 15.5 cents biweekly per $1,000 of coverage. Basic coverage is automatic unless waived.

Enrollees can choose from three optional forms of life insurance: Option A offers an additional $10,000 of coverage, Option B provides up to five multiples of basic pay rounded to the next $1,000, and Option C provides up to $25,000 of coverage for a spouse and up to $12,500 per child. The cost of optional coverage increases with age. For example, an enrollee under age 35 pays 3 cents biweekly for each $1,000 of Option B coverage while a 45-year-old pays 10 cents and a 55-year-old pays 31 cents. A 1998 Congressional Budget Office comparison of federal benefits with those of 800 large companies found that FEGLI made a "relatively poor showing," especially for younger employees. About 90 percent of the private firms offer at least some insurance entirely at the employer's expense, and many plans have higher benefits than the government's, CBO found. "In addition, many firms in the private sector offer lower premiums to younger employees," CBO said. "Some offer benefits free to the youngest employees. In contrast, the [basic] federal program charges the same premium to all employees. Thus, at younger ages, the federal fees in many cases exceed the value of insurance, even considering the additional benefits provided to younger workers."

That shortcoming is highlighted at a time when anyone with Internet access can go to any of a half-dozen Web sites featuring comparative insurance quotes and get prices from scores of companies that can beat FEGLI's prices. Their features vary considerably, however-for example, the insurance might be only for a limited term, after which the enrollee would have to renew the policy or take out a new one, probably at a higher price. Experts say that determining whether FEGLI's features and premiums are the best deal, or even a good deal, for an individual depends on personal circumstances-age, health, family situation, debt, other assets and numerous other factors. But one indicator of its general position in the insurance market is the presence of companies selling insurance into the federal and postal employee population as a complement to, or substitute for, what FEGLI provides.

"A lot of people can get a better deal in the private market if they want to go through the application process. They'll find plans that have rates that are significantly less than FEGLI. They can save significant amounts of money," says John Montague, executive director of Worldwide Assurance for Employees of Public Agencies (WAEPA), one of those companies. "There's more flexibility in the private market to changing needs, and how insurance needs to change over your lifetime. FEGLI's pretty much static based on what you earn," he adds. "At certain points in your life you need more coverage, and the fact that FEGLI is just based on your salary, that limits your choices. You may come into the federal government in your 20s. You may be single and not need a lot of coverage. And then 10 years later you may have a family and a mortgage. You may have obligations where you need more insurance that you may not be able to get through FEGLI."

Unlike the annual open enrollment opportunities in the federal health plan, FEGLI open seasons are tied to occasional benefit or premium-level changes. In addition to open seasons, enrollees may add coverage by submitting proof of insurability-similar to the procedure for buying insurance privately, except that FEGLI imposes a one-year wait-or after certain life events, such as marriage or the birth of a child. But many events that might cause a need for additional insurance, such as taking on a mortgage or enrolling a child in college, do not qualify under FEGLI. As an OPM official notes, direct comparisons between FEGLI and other insurance are difficult because of its unique structure. For example, its basic coverage has a fixed premium regardless of the enrollee's age, though premiums do fluctuate with salary, and it has continued value after retirement. "You can't compare it to straight term insurance because term insurance doesn't have any residual value; you can't compare it to whole life, because whole life has a much higher residual value," he says. "It's a very mixed breed of animal that we have here."

While participation in FEGLI's basic coverage has held steady over the years at about 90 percent, participation in its options has been declining, largely because of cost considerations, the OPM official says. (Data on potential new enrollments in optional coverage during the 1999 open season aren't available yet.)

"Our premiums are based entirely on the experience in our program. Our insured population doesn't have favorable demographic characteristics," he says. "Many of the people who have characteristics that are favorable from a life insurance standpoint have opted out of our optional program and have elected to buy insurance privately. Because they're not in our pool anymore, our pool is a little less attractive, and that's reflected in our mortality. That in turn is reflected in our premium rates. As our rates go up, the rates outside look even better and more people leave our pool, and it's sort of a spiral that continues."

FEGLI's Advantages

Even insurance industry officials in the business of competing with FEGLI say it does have strong points. For example, the program provides automatic and continuing coverage that could be difficult to get in the private market, particularly for those with medical conditions. And in terms of premium cost, FEGLI is competitive with other group-based plans, particularly given the demographics of the group FEGLI covers: federal and postal employees, retirees and their family members. Military service members, retirees and their families are covered by a different life insurance program. The federal civilian population's relatively high average age works against it, but several forces are working in its favor. A high percentage of enrollees have health insurance, and because it is a predominantly white-collar group, relatively few members are in hazardous jobs. The large size of the group also provides stability in rates of claims submissions and thus premiums.

When employees compare costs of a group plan with what they might buy individually, "you're really doing a disservice to the group plan," says John Cahalin, executive vice president of Wright & Co., which targets the federal and postal market. "An employee that would be covered by a group-a union, a company-would have a composite group rate much like the basic plan under FEGLI. That normally would reflect the experience of that group."

Another accepted strong point of FEGLI is its continued coverage into retirement-with some of it free for enrollees who accept a reduction in benefits-a rarity among offerings by private-sector employers. However, just as its rates might not be competitive for people beginning their careers, its structure can be a detriment for those at the end of their careers, insurance industry officials say. With no cash accumulation and only limited opportunities to increase coverage, FEGLI falls short of life insurance available elsewhere as a retirement- and estate-planning tool, they say.

For example, many federal employees are carrying heavy debt even as they approach retirement, says Wright & Co. Vice President Carmen Patete. "If we can get a 45-year-old to anticipate the debt service and how long it's going to be, then we can look at what their insurance needs are going to be. Depending on what the FEGLI costs are and what other insurance programs are out there, and depending on the sensibilities of the individuals themselves, you can fashion a plan that will have the insurance amount and duration appropriate."

Working through such considerations requires an individual to have a reliable, professional source of information. Companies that market to the federal population frequently sponsor seminars and offer individual counseling on those issues. Although those companies clearly have a financial motive, such sessions do provide information that employees might not get through their agencies.

"The biggest problems with personnel offices are No. 1, there's fewer of them than there used to be; No. 2, there's tremendous turnover; and three, they know nothing about insurance other than FEGLI. That's all they know and that's what they sign people up for," says G. Jerry Shaw, general counsel of the Senior Executives Association. "The thing that's not been provided to federal employees is the knowledge that they need to be paying attention to their insurance as they go along. Most agencies try to give employees a retirement-planning seminar within the last five years they're in government, but that's too late. That's fine for retirement, but from an estate-planning standpoint and an insurance standpoint, that's too late."

The OPM official notes that the Thrift Savings Plan is available to help fill the cash-building role and that employees have private-sector alternatives available as well. "I don't know that we've ever thought of ourselves as a financial adviser with respect to the workforce or as an important piece of helping employees deal with estate planning," he says.

Behind the Times? While FEGLI offers only term insurance, the insurance market has experienced rapid growth in cash-accumulating offerings such as universal and variable universal life. The former combines term insurance and an investment feature in which the premium amount in excess of the actual cost for insurance is invested in an interest-bearing individual account at a guaranteed rate of return. The latter is a variant in which a broader range of investment vehicles is available. Earnings on the investments in such accounts are tax-deferred. FEGLI, as strictly term insurance, offers no favorable tax treatment.

Moreover, the FEGLI maximum on spousal insurance is just $25,000, far below what is available in the private market. Until 1999, the FEGLI spousal maximum was just $5,000. Similarly, FEGLI didn't introduce a "living benefit" feature, in which a terminally ill enrollee can draw out benefits before death, until 1995. "They really haven't changed," says Montague of WAEPA. "They really haven't done anything to enhance the program. The program is relatively static from a benefits and price standpoint. There are significantly more choices in the market."

A related issue is whether FEGLI is a valuable offering for recruiting and retaining employees in today's economy. Many of the government's competitors in the labor pool already have insurance offerings such as cash-accumulating policies. "Basically what we're seeing is that due to the tight labor market, [private-sector companies are] looking for ways to attract and retain employees," says Pat Leary, associate scientist at LIMRA International, a market research firm for the financial services industry. "What we find is that most large employers have their established benefit packages in place. They already have the life, dental, disability and medical insurance," Leary says. "When they look to add new voluntary benefits, they're looking to supplement the universal life and, variable universal life insurance, and other benefits they currently offer with many nontraditional benefits-things like long-term care, auto and homeowners insurance, prepaid legal plans, financial planning services, things along these lines. They're trying to differentiate themselves from the competition."

However, in the FEGLI program adding a benefit or changing the structure of an existing benefit literally takes an act of Congress. The most recent FEGLI reform passed in 1998, when limits on coverage of spouses and children were raised and enrollees became eligible to elect carrying FEGLI Option B and C coverage unreduced past age 65 at their own expense. An open season in 1999 allowed enrollees to make those changes.

That measure also ordered OPM to report on levels of interest in new options such as voluntary accidental death and dismemberment coverage and cash-accumulating features such as universal life and variable universal life. That report, issued in May 1999, said that a survey of about 1,500 enrollees found "very high satisfaction" with the customer service, overall features and benefits available under FEGLI. However, about half expressed an interest in voluntary accidental death and dismemberment coverage, 42 percent in group universal life and 23 percent in group variable universal life.

Slightly more than half the enrollees surveyed said they had insurance other than FEGLI, and of those, most said they carried other insurance because they wanted more coverage. A third said they wanted insurance with cash-accumulating value, and 15 percent said their other insurance was less expensive than FEGLI. OPM also surveyed more than 800 non-enrolled employees and found that most of them also had other life insurance and that nearly half of them took out that insurance because it cost less than FEGLI.

In the report, OPM said it planned to consider offering additional insurance products. The primary backer of the law requiring the report, then-House Civil Service Subcommittee Chairman John Mica, R-Fla., envisioned the study as laying the groundwork for getting such benefits enacted in the current Congress. As the 106th Congress winds down, however, there has been little movement toward FEGLI reform other than an August 1999 hearing at which Mica, still a member of the civil service panel although no longer chairman, criticized OPM for failing to produce firm recommendations. A year later, the administration has yet to make a proposal, and FEGLI reform has remained a back-burner item. "The priority has been to try to get long-term care through. Given the short legislative calendar, it just didn't really seem it would be feasible to try to move something as big as that and long-term care," says Garry Ewing, staff director of the House civil service subcommittee.

Early in the drafting of the long-term care plan, consideration was given to handling both issues at once by making long-term care a feature of FEGLI. That idea was dropped, however, as civil service leaders struggled to craft a long-term care design that would be acceptable all around. Congress may take up the issue of additional FEGLI options next year. As for a plan from the administration, Ewing says, "We waited for some time for the administration to forward its proposal, which they never have. We've never been told formally that we won't get one." Officials say the main barrier is concern in the Treasury Department about the tax implications of offering federal employees tax-favored, cash-accumulating policies. They say the idea appears to be dead, at least for this year.

No Competition Another issue that may draw renewed attention is the lack of competition in FEGLI. Although the federal health insurance program undergoes price negotiations each year involving hundreds of plans, FEGLI has only one carrier, Metropolitan Life Insurance Co., which has had the account since the program started in 1954.

OPM notes that the program is technically a commercial life insurance product, but it effectively has become a self-insured program. The premiums are designed to cover the cost of the program, based on a well-established claims record. OPM and MetLife annually negotiate the company's profit, which in 1999 was $510,000. MetLife's operating costs were $7.25 million on a program that paid out $1.65 billion that year, says OPM. "If you recompeted the contract, the policy terms are going to be the same. The cost of claims is going to be the same. The mortality experience is not going to be any different, so the premiums aren't going to change," the OPM official says. "Could somebody administer it for substantially less than Met does? If you're talking total administrative costs that are only equal to 44 hundredths of 1 percent, where's your margin? You're not going to affect the premiums by making an award to a new contractor, and chances are you're not going to be able to do much in the way of negotiating a lower profit."

MetLife declined to make an official available for an interview. However, a spokeswoman says the company's position is that it is only the primary insurer and administrator of the program and plays no active role in its design or premiums. "MetLife does not have any responsibility or role in determining the program benefits or the rates," she says. The spokeswoman says the company stands by its testimony in 1997 House hearings at which a MetLife official said, "administration by a single carrier continues to be the most efficient and economical approach to administering the program." The lack of competition in FEGLI has been a theme of past House hearings, however, and it also has drawn the attention of the insurance industry. "Just to spur some industry competition for the business-see who could do the best job-that always proves to the benefit of the sponsor," says Michael Bartholomew, senior counsel of the American Council of Life Insurers. "National associations like AARP put out for bid who's going to be the carrier for the benefits they offer their members. It's to the benefit of the members to get the best and most modern and flexible plan that meets their needs.

"With respect to the federal employees, I think Congress' perception is that for the basic plan, we can live with having one carrier," Bartholomew adds. "When you get to plans where the federal government isn't anything but basically a vehicle under which you can sell additional life insurance that the employee purchases out of his or her own funds, then you ought to give them a choice." Creating more choice in FEGLI would not necessarily be an easy task, since that would require redesigning the way employee premiums are collected and distributed, he says. "I think the legislators see great merit in the products and the ability to do it. I just think [that] because it's a bureaucracy, it gets bogged down in the details of how it gets processed through the system."