Life Insurance Basics

One of the key decisions you must make when you retire is what to do about your life insurance coverage.

Federal employees are automatically enrolled in the basic version of the Federal Employee’s Group Life Insurance plan when they are first hired and can add optional insurance to supplement it. There’s no underwriting (medical exam or questions) for new hires or for employees who wish to increase their coverage when they experience certain life events: marriage, divorce, birth or adoption of a child, or death of a spouse. There’s also no underwriting during a FEGLI open enrollment period. The last such period was in September 2004, and there’s been no announcement of a future open enrollment.

This week, I’ll review basic FEGLI coverage options. Next week, we’ll go over optional coverage.

Basic Coverage

FEGLI is a form of term life insurance. It falls into that category because it doesn’t build up cash value, but FEGLI actually doesn’t have a term, such as 15 or 20 years, like private term insurance does. Federal employees can maintain basic FEGLI throughout their federal careers and into retirement. Employees who opt for no reduction of basic FEGLI at retirement can maintain this level of coverage for life if they are willing to pay for it.

As an employee’s salary increases, the amount of basic life insurance increases automatically. The value of basic insurance is determined by your annual basic pay rate (including locality pay adjustments), rounded up to the next even $1,000, plus an additional $2,000. So, for example, if Kevin makes $53,400, this would be rounded up to $54,000 and $2,000 would be added, for a total of $56,000 worth of basic life insurance. Employees who are under age 45 have extra coverage without paying an extra premium. If Kevin were 35 years old or younger, his basic FEGLI would pay his beneficiary a $112,000 death benefit if he died. This extra benefit is cut by 10 percent each year between until age 45. After 45, the death benefit is just the basic insurance amount.

Basic FEGLI also provides an accidental death and dismemberment benefit for employees. And it includes a living benefit for those who are diagnosed with a terminal illness with a life expectancy of nine months or less. FEGLI pays regardless of cause of death -- unless your beneficiary causes your death.

If you’ve waived your FEGLI basic coverage more than a year ago, you can reenroll. If you are not experiencing a life event and it’s not open season, you must take a physical at your expense and submit form SF 2822 to your human resources office within 60 days of the exam. If you’ve had a life event, you have 60 days to select basic or optional coverage.

For basic coverage, all employees pay 15 cents per $1,000 of salary biweekly, regardless of their age. In the above example, Kevin would pay $8.40 biweekly to maintain his coverage. The cost of basic insurance is shared between you and the government, with the government covering a third of the cost.

Into Retirement

Basic insurance follows you into retirement based on your final pay rate, as long as you are retiring on an immediate annuity and have been covered for the last five years of your federal career. At the time you retire, you’ll have the choice of no reduction in coverage, a 50 percent reduction, or a 75 percent cut.

So, for example, let’s say Leah has a final salary rate of $62,400. Her basic FEGLI is worth $65,000 ($62,400 rounded up to $63,000 plus $2,000). She pays $9.75 biweekly and on a monthly basis the premium will be $21.12 per month (.325 cents x $1,000/month). If she chooses the 75 percent reduction, she will pay $21.12 a month after she is retired until she turns 65. (If she’s already past 65 at retirement, the coverage will be free, but the reduction will begin immediately.) At that time her premiums will end and her coverage will begin to reduce by 2 percent per month until it goes down by 75 percent, leaving Leah a basic FEGLI benefit of $16,250. If she lives to be 98 years old, her beneficiary will receive that amount, and the last time Leah would have paid premiums was either when she retired or when she turned age 65, whichever was later.

If Leah chooses the 50 percent reduction, she’ll will pay an additional premium of 64 cents per $1,000 per month. That would be an additional $41.60 a month, plus the $21.12 a month shown above, for a total monthly withholding of $62.72. After age 65 (or retirement, if later) her coverage would go down by 1 percent per month ($650) until her remaining coverage was worth 50 percent of its initial value. (In Leah’s case, that would mean it went down to $32,500.) She would continue paying the $41.60 month even after the basic premium ended at 65. She could cancel her choice of this level of coverage, allowing the benefit to reduce by 75 percent, but she would not get a refund of premiums paid.

If Leah were to choose the option of no reduction in coverage, then she would pay an additional premium of $1.94 per $1,000 per month. So she would pay $126.10 ($1.94 x 65) and her coverage would remain at $65,000 even after she turned 65. But she would have to continue paying this additional premium to maintain the benefit. If Leah retired before turning 65, she would pay the basic premium of $21.12 a month in addition to the $126.10 monthly premium for choosing no reduction.

Bottom Line

The 50 percent and no reduction options add an additional expense to FEGLI after retirement and should be chosen only if you can justify paying these additional premiums. Suppose, for example, that Leah adopted her sister’s young children when she was 55, and is now responsible for raising them. She might need to maintain a greater amount of life insurance past 65. If she can’t obtain reasonably priced private life insurance to supplement her basic FEGLI, she might choose the 50 percent or no reduction option for basic FEGLI at retirement.

Keep in mind that until you are retired and 65, you’ll get basic FEGLI at the same cost -- 15 cents per $1,000 biweekly, or 32.5 cents per $1,000 monthly. The coverage doesn’t begin to reduce until you are over 65 and retired. So the question you should ask yourself at retirement is “how much life insurance do I really need to provide protection to my family after I’m 65?”

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.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Mondays at 10 a.m. EDT on Federalnewsradio.com, or on WFED AM 1500 in the Washington-metro area.