Figuring Out How Much Life Insurance You Need

The Federal Employees' Group Life Insurance program, established in 1954, is the largest group life insurance program in the world, covering over 4 million federal employees and retirees, as well as many of their family members. But it wasn’t the first life insurance coverage offered to civilian federal employees. That honor goes to what was originally known as the War Agencies Employees Protective Association, which was created in 1943. Both FEGLI and WAEPA are still going strong.

This week, let’s look at what FEGLI and WAEPA have to offer, with an eye toward helping you determine how much life insurance you need.

First, the basics: Life insurance provides protection for your loved ones in the event of your death. Term life insurance guarantees payment of a certain death benefit if the covered person dies during a specified term. FEGLI and WAEPA are forms of term insurance. Permanent life insurance, by contrast, never expires. 

How much coverage you need depends on several different factors. WAEPA provides this general formula: First, calculate your obligations: annual salary + mortgage balance + other debts + future needs. Then subtract liquid assets such as savings, college funds and survivor benefits you may be receiving. Remember that if you have no dependents and have enough in liquid assets to cover your final expenses, you may not need much, if any, life insurance. 

Let’s look at a hypothetical example of a federal employee who passes away. He’s married with no children, is 53 years old and has been under the Federal Employees Retirement System for 20 years. His current salary is $80,000 per year. He has a current balance of $400,000 in the Thrift Savings Plan. In addition, he has a $200,000 balance on his mortgage and $20,000 remaining on a car loan. This means that he may need enough life insurance to replace his $80,000 salary plus an additional $220,000. 

His surviving spouse will receive the following:

• The $400,000 in the TSP. 
• Social Security widow’s benefits based on the deceased’s earnings record payable at $2,500 a month. This benefit is not available until the spouse is 60 years old, unless she is disabled or caring for a child under age 16.
• A FERS lump sum death benefit of $37,055, plus $40,000 (the lump sum benefit and 50 percent of the employee’s final salary are payable to a surviving spouse if the deceased employee has at least 18 months of service.)
• A FERS spousal survivor annuity, computed as 50 percent of the employee's length of service x  their high-three average salary x 1%. To be eligible to provide this benefit, the employee must have 10 years of federal service, including a minimum of 5 years of civilian service. In this example, the survivor benefit would be computed as 20 x $76,000 x 1% = $15,200 per year or $1,266 per month.

With all of these benefits, the recurring income to the surviving spouse would be $45,200 a year, or $3,767 a month. The mortgage and car loan could be paid off using the proceeds of a tax-free life insurance payment, leaving the other lump sum benefits to be used for future retirement savings for the surviving spouse or converted immediately to income. 

This employee might want to have at least $220,000 of life insurance so that his spouse could use tax-free money to pay off the mortgage and car loan balance and use the other lump sum benefits from FERS and the TSP to provide an additional $10,000 a year in annual income. Remember that both the distributions from the traditional TSP balance and the FERS lump sum death benefit are taxable.