Life Insurance Options, Part One

During the next two weeks, we'll look at options to consider in weighing how to factor life insurance into your retirement planning efforts. Here are the top 10 questions commonly asked about the Federal Employees' Group Life Insurance program:

• How much FEGLI coverage do I currently have?
• How much am I allowed to keep in retirement?
• How much will it cost to keep it?
• Where do I sign up?
• How much should I keep in retirement?
• Who will benefit from this coverage?
• What is the purpose of this insurance?
• When will it no longer be needed?
• Is FEGLI my only choice?
• What other benefits are payable when I die?

How much FEGLI coverage do I currently have?

If you are organized, you could probably find out by looking in the three-ring binder that you have at home or in your desk where you file all of your copies of your personnel records. You will find your last FEGLI coverage selections on Standard Form 2817.

If you're not that organized, then look at your last leave and earnings statement. You will see the withholding for FEGLI and also a code or possibly a brief description of your coverage. For example, code J1 means you are covered by Basic + Option B (1x) + Option A + Option C (1x). Here are what some of those terms mean:

• Basic FEGLI: Basic coverage is equal to your salary (base pay plus locality differentials) rounded up to the next $1,000, plus $2,000. If you are under age 45, you will have a little extra coverage.
• Option A: $10,000
• Option B: Multiples of your salary (rounded up to the next $1,000), up to five times of salary.
• Option C: Coverage on the life of your spouse and dependent children. The value of this benefit is $5,000 to $25,000 on your spouse and $2,500 to $12,500 on each eligible child. You are the beneficiary of Option C and the premiums you pay are based on your age.

How much am I allowed to keep in retirement?

The amount of basic FEGLI you will carry into retirement is based on your salary on the day you retire. You are eligible to continue basic insurance -- or have it reinstated -- if you meet all the following requirements:

• You retire, rather than resign, from federal service.
• You have been insured for the five years immediately preceding your retirement or since your first opportunity to enroll. Take the example of Sal, who worked for the Commerce Department from 1980 to 1988, during which time he was covered by FEGLI. He returned to federal service and reinstated his basic insurance in 2005 and plans to retire at the end of 2006. He will be eligible to continue his basic FEGLI coverage since he was covered during his last five years of federal service. The break in federal employment doesn't count against him.
• You have not converted your life insurance coverage to an individual policy -- or, if you have already converted the coverage, you cancel the converted policy.

For example, suppose Anne added three multiples of Option B coverage in 2004, and intends to retire at the end of 2009. Since her additional coverage took effect in September 2005 (one year after the open season ended), she will not have maintained this coverage for five years until September 2010. Anne will not be eligible to continue her Option B coverage if she retires in 2009. She may, however, keep the basic insurance and any other optional coverage she had in effect prior to the 2004 change.

How much will it cost to keep it?

OPM deducts FEGLI premiums from your CSRS or FERS retirement payment each month. (Monthly budgeting may take a little getting used to after receiving biweekly pay checks during your federal career.)

Here are your choices:

• Cancellation: You may cancel any of your FEGLI coverage at any time, before or after you retire. But keep in mind that if you do so, it's a one-way ticket out; you can't reinstate coverage later. This includes Option C: Even if you remarry after retirement, you can't get coverage for your spouse or children if it had been canceled or not carried into retirement.
• Basic Coverage, 75 Percent Reduction: Under this option, you maintain the basic coverage that was in effect on your last day of employment, but after age 65 (or when you retire if you are already over 65), coverage reduces by 2 percent per month until it reaches 25 percent of its original value. You stop paying premiums ($0.325 per $1,000 of coverage per month) when the reduction begins. Here's an example: Joe took this option when he retired at age 58 in 1990. His final salary was $47,400 and his basic FEGLI was worth $50,000. Joe had $16.25 deducted from his monthly retirement payment until age 65. A month later, the premiums stopped. Joe's coverage gradually declined from $50,000 to $12,500 when he was 68. If Joe died this year, his beneficiary would receive a payment of $12,500.
• Basic Coverage, 50 Percent Reduction: Under this option, when you turn 65, coverage declines by 1 percent per month until it reaches 50 percent of the original value. You pay basic premiums ($.325 per $1,000 of coverage per month) and additional premiums ($0.60 per $1,000 of coverage per month) for this benefit until the reduction begins. After that, you must continue paying the additional premiums. You may cancel this option at any time and drop back to the 75 percent option. So, for example, suppose Sarah retired at age 72 and still had three years of payments to make on her new car. She wanted her granddaughter, Amy to have the car if she died. Sarah chose the 50 percent reduction so if she died early, there would be money left to Amy to finish paying for the car. Sarah had a final salary of $83,500 when she retired in 2002 and basic coverage of $86,000. Since she was older than 65, she only had to pay the additional premium of $51.60 and her insurance began to decline by $860 per month. In 2005, the car was paid for and Sarah changed her election to the 75 percent reduction. Her insurance benefit immediately was reduced to $21,500 (as if she had elected the 75 percent reduction when she retired) and the premiums stopped.
• Basic Coverage: No Reduction: Under this option, you can maintain the basic coverage in effect on your last day of employment. You will pay basic premiums ($.325 per $1,000 of coverage per month) and additional premiums ($1.83 per $1,000 of coverage per month) for this benefit until you turn 65, and then pay only the additional premiums. You can cancel this election at any time and drop back to the 75 percent option. Take the case of Harry, who retired at age 64 because of a serious illness. He chose no reduction of his basic insurance so his wife would receive the full value of his basic insurance upon his death. Harry's final salary as a senior executive was $143,500 and the value of his basic insurance was $146,000. Since he retired before he was 65, he had to pay the basic premium of $47.45 plus the additional premium of $267.18 per month. When Harry turns age 65, that premium will continue unless he later decides to drop to the 75 percent reduction option.
• Standard Option A Coverage: You don't need to make a retirement election for Standard Option A coverage. After you turn 65 (and are retired), your Option A coverage of $10,000 will decline by 2 percent per month until it reaches $2,500. No withholding is required after you turn 65.
• Option B and C Coverage, Full Reduction: After you turn 65 or retire (if later), your Option B or Option C coverage will decline by 2 percent of the pre-retirement amount per month for 50 months, at which time coverage will end.
• Option B and C Coverage, No Reduction: Retiring employees may choose to continue Option B and Option C coverage on an unreduced basis. They will continue to pay premiums after age 65. Annuitants who choose unreduced coverage may later cancel the coverage and have the full reduction. Annuitants may not re-enroll. You may elect full reduction for Option B and no reduction for Option C or vice versa.

Life insurance open seasons are held quite infrequently, and you should not count on one occurring any time soon. You will receive plenty of notice if and when there is an open season. The most recent FEGLI Open Seasons were held in 2004 and 1999.

When you retire, you will make your choices on the Continuation of Life Insurance Coverage form (SF 2818).

If at least one year has passed since the effective date of your last waiver of life insurance coverage (if you did not select particular coverage it is considered waived), you may get a physical exam at your own expense using SF 2822. You and your human resources office must complete part of the form. You then take the form to your physician. He or she will then complete the rest of the form and send it to the Office of Federal Employees' Group Life Insurance. If the office approves your request, they will notify your agency's human resources office. If you have an event such as marriage, divorce, death of a spouse, or birth of a child, you may increase coverage under Option B and Option C. That choice must be made within 60 days after the event.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.