Life Insurance Options, Part Two

In last week's column, we began our discussion of life insurance, covering the basics of the Federal Employees Group Life Insurance program. It was an appropriate time to take up this issue, I've since learned, because September is Life Insurance Awareness Month. (Don't believe me? Click here.)

Federal employees are automatically enrolled in basic FEGLI coverage at the beginning of their service. Most maintain this basic coverage throughout their careers and into retirement. Some also enroll in additional optional coverage as their needs for life insurance increase. Because FEGLI has few open enrollment periods, the program generally gets very little attention. But when employees begin planning for retirement, FEGLI issues and other life insurance options usually rise to the surface.

Last week, you may remember that I laid out the top 10 FEGLI-related questions:

• 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 life insurance should I keep in retirement?

According to the Life and Health Insurance Foundation for Education, the answer isn't really how much insurance you need; it'show much money your family will need after you're gone. That includes funds for funeral expenses and debts, and sufficient income to maintain your family's standard of living over the long haul.

Make sure to take other "death" benefits besides insurance into consideration when you evaluate the amount of money your loved ones will need after you die. There are survivors' benefits for dependent children and spouses under both the Civil Service Retirement System and the Federal Employees Retirement System. Someone also will receive the proceeds from your Thrift Savings Plan account. As the value of your federal benefits increase throughout your career, the need for life insurance -- or at least large amounts of life insurance -- may decrease. Also, remember that your answer to this question will change over time. Many employees increase their life insurance at the time of major events such as marriage, divorce or the birth of a child. But when these financial obligations decline over time, they often neglect to re-evaluate their needs.

Who will benefit from this coverage?

Don't forget to update your FEGLI beneficiary designation when such events occur, using form SF 2823.

When you die, the Office of Federal Employees' Group Life Insurance will pay life insurance benefits in a particular order set by law. If you did not assign ownership of your benefits and there is no valid court order on file with your agency or the Office of Personnel Management, then OFEGLI will decide who should get the benefits in the following order of preference:

• To the beneficiary or beneficiaries you have validly designated.
• To your widow or widower.
• To your child or children and the descendants of any deceased children (a court will usually have to appoint a guardian to receive payment for a minor child).
• To your parents in equal shares, or the entire amount to the surviving parent.
• To the court-appointed executor or administrator of your estate.
• To your other next of kin entitled under the laws of the state where you lived.

What is the purpose of this coverage?

Let's look at this one from various angles, examining the questions you should be asking yourself:

• You're single: Is there anyone depending on you for financial support, such as aging parents or siblings? Are you carrying significant debt you don't want to pass on to family members who survive you? If you're in this kind of situation, you should own life insurance because you wouldn't want your loved ones to be burdened financially in the event of your premature death.
• You're married: If you were to die suddenly, would your spouse be able to maintain the household, continue plans for retirement and maintain a comfortable standard of living without your income?
• You're a single parent: You have the responsibility to provide emotional as well as financial security for your children. If you weren't around, would there be enough resources for someone else to take over this important job and provide for your children?
• You have a stay-at-home spouse: If your spouse stays home with the children and doesn't have wages to protect, you might think he or she doesn't need as much life insurance. But the reality is that if they weren't around to provide the services of cook, chauffeur, nurse, teacher and caregiver, what kind of price would you have to pay for these services?
• Your kids are grown and your mortgage is paid: If you died today, your spouse still would be faced with daily living expenses. What if he or she outlives you by 10, 20 or 30 years? Would your financial plan enable your spouse to maintain the lifestyle you worked so hard to achieve? And would you be able to pass on something to your children or grandchildren?

Many federal retirees let their life insurance benefit gradually decline in value. Maintaining the full level of coverage for the rest of your life can get very expensive. After evaluating your needs, you may realize that the price you are paying to remain covered is no longer worth the premiums you are paying. But remember, once you cancel insurance coverage, you may never be able to re-enroll.

Is FEGLI my only choice?

You may have many choices for obtaining life insurance, depending on your "insurability." FEGLI covers everyone in the federal "family" regardless of their health or other factors. This is not true of other insurance plans. When you apply for life insurance, the company will examine a number of factors based on its underwriting standards and guidelines. These include your:

• Health and physical condition.
• Medical history.
• Job. (A law enforcement officer presents a higher risk than a financial analyst.)
• Personal habits (including whether or not you smoke or have a history of alcohol or drug abuse).
• Avocations and hobbies. (Taking up hang-gliding could increase your premiums.)
• Age. (A 50-year-old applicant will pay higher rates than a 30-year-old.)
• Gender. (Although the statistics may be changing, women still have slightly longer life expectancies than men.)

Do some research on insurance companies you're considering to make sure they're financially sound. Here are some resources that can help:

• Weiss Research(the most rigorous of the bunch)
• A.M. Best
• Moody's Investor Services
• Standard and Poor's

Earlier this year, I wrote columns on beneficiary designations and spousal benefits that examine this question in detail.

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.