Buy This and Hope You Don’t Get Your Money’s Worth

Insurance is something we all need and we all hope we never get our money’s worth out of buying. After all, if we do, it means something bad has happened.

The ultimate example of this is life insurance, which is purchased to protect against your untimely death. You need the greatest amount of life insurance when your death would cause a financial hardship for your loved ones.

When deciding how much life insurance you need, consider questions like these:

• If you have children, will there be enough money to provide for their needs until they become independent?
• If you’re married, will your spouse be able to afford rent or mortgage payments if your income suddenly stopped?
• How much will your final expenses cost?

There are two types of life insurance: term and permanent. Term insurance, designed to cover a specific time frame, can be used for the typical needs for life insurance, like those listed above. Permanent insurance, the most common type of which is known as “whole life” insurance, is more expensive since it is meant to be kept for, well, your whole life.

Term life insurance policies are often renewable at the end of the term, but the cost is based on the age of the insured individual. Term insurance can be purchased for pennies per $1,000 of coverage when bought at a young age, but renewing coverage in your later years can be prohibitively expensive.

Most federal employees, including part-time employees, are eligible for Federal Employees Group Life Insurance. FEGLI is a type of term insurance. It has no cash value, and although there is not a specific term, coverage increases in cost as you get older.

Here are some important points about FEGLI, from the FEGLI program booklet:

• If eligible, you are automatically covered under basic life insurance, unless you waive it.
• You must take action, within strict time limits, to get optional insurance.
• If you elect optional coverage when you are first eligible, you can get it without having to provide medical information to prove insurability.
• FEGLI offers group rates and payroll deductions.
• The government pays one-third of the cost of basic insurance.
• You pay 100% of the cost of optional insurance.
• You can’t get a loan by borrowing from FEGLI insurance.

How Much Do You Have?

If you are covered under FEGLI, there’s a simple way to figure out how much coverage you currently have. Just look at a copy of your most recent Standard Form 50 (Notification of Personnel Action). In Block 27 on that form, there is a two-character code that represents your current coverage. You can look up the codes and see what they mean, and then use the Office of Personnel Management’s FEGLI calculator to determine the current value of your coverage.

How Much Do You Need?

The FEGLI program booklet provides some general guidelines and also says you may want to consult with a financial adviser for an analysis of your life insurance needs.

A rule of thumb is five to 20 times your annual salary (more if you’re younger and less if you’re older). From that sum, subtract the balance in your Thrift Savings Plan and other retirement or investment accounts. Remember that your survivors may also be entitled to receive monthly income from your survivor benefits, other pensions (such as a military benefit) and Social Security payments.

In the end, you need to make a decision about coverage based on your individual circumstances. Typically, the most important factor to consider is your liabilities. Do you have a car payment? A home mortgage? A desire to provide for your child’s college education? Add up these and other costs, and you can figure out the minimum coverage you need.

Basic FEGLI

One-third of the premium for basic FEGLI insurance is covered by the government. The employee (or eligible retiree under age 65) pays two-thirds. The rate is $0.15 per $1,000 of coverage biweekly while you are employed. The death benefit is determined by your basic salary rate rounded to the next highest $1,000, plus an additional $2,000.

For example, if Kim has a salary of $77,500, then her FEGLI basic life insurance would cost $12 biweekly and would pay her beneficiary a payment of $80,000 upon her death.

At retirement, your basic FEGLI is based on your final pay rate and continues at that level and for the same price ($0.325 per $1,000 of coverage per month) until age 65. The default election at retirement is the 75 percent reduction option, meaning that at age 65 (or at retirement, if later than 65), the insurance is free and the death benefit reduces by 2% per month until the coverage goes down by 75%. That leaves 25% of the death benefit remaining to help cover your final expenses, even if you live to 105.

Using the previous example, if Kim took the 75 percent reduction option upon retiring at 60, then she would pay $26 per month to continue $80,000 worth of basic FEGLI until she turned 65. After that, she’d no longer have to pay a premium. But over the next three years, the benefit would reduce by 2 percent per month until it got to $20,000 (25 percent of the original value). Her beneficiary would receive at least $20,000 regardless of how long she lived past age 65.

You can choose to take only a 50 percent reduction, or no reduction at all, at the time you retire if you’re willing to pay an additional premium during retirement.

Optional FEGLI

FEGLI offers optional life insurance in addition to basic coverage. OPM has a contract with the MetLife to provide the insurance. There are three options:

• Option A (Standard): $10,000 death benefit. Your premium is based on your age and ranges from $0.20 biweekly to $6.00 biweekly.
• Option B (Additional): Multiples of your salary, up to five times your basic pay (rounded to the highest $1,000). Your premium is based on your age and how much coverage you have. It ranges from $0.02 per  $1,000 of coverage biweekly to $2.64 per $1,000 biweekly.
• Option C (Family): Coverage for your spouse and dependent children. The benefit for your spouse is $5,000 and each dependent child is insured for $2,500. Your premium is based on your age and on how many multiples you carry. It ranges from $0.22 per multiple biweekly to $7.20 per multiple biweekly.

Some federal employees opt to replace Option B with private life insurance. You may find cheaper rates—sometimes significantly cheaper—but there are a few things to know before you cancel Option B:

• To purchase life insurance you must be insurable. Be sure that you will be able to pass the medical underwriting if you are contemplating buying a private life insurance policy.
• FEGLI floats with your salary, so every time you get a pay increase due to a promotion, step increase or basic pay adjustment, the amount of your basic coverage and Option B will increase at the same rate.
• FEGLI pays your beneficiary no matter the cause of death, unless your death was intentionally caused by your beneficiary.
• If you are willing to pay the premiums, then you can get Option B for the rest of your life, but it does get very expensive later in life.

Remember to maintain your FEGLI beneficiary form to be sure that your insurance is paid according to your wishes. If you want to change your beneficiaries, complete an SF 2823 form and submit it to your human resources office.

Correction: The original version of this article misstated the the way the premiums for Basic FEGLI are divided between the government and employees. The article has been updated to correct the error.