If you are a federal employee, you may have noticed how expensive your group life insurance (FEGLI) is getting.
You may have been automatically enrolled in FEGLI when you started to work, however are you really sure FEGLI is the right choice for you?
In most cases, you can save dramatically versus the government rates for your FEGLI coverage.
Save up to 73% with an average savings of 57%.
Or, get up to 3 times the coverage for the same rates that you're paying now.
Just how much life insurance do you really need?
There are a few ways to determine how much life insurance is enough. Most people will think of an amount to pay off their major debts, like a mortgage, and feel that is adequate.
We have helped families with many death claims; let me suggest that just paying off the debt may not be enough. Should you die while young children are in the household, there are rising expenses above and beyond the mortgage to take care of their future. Your family will need money for things like food, clothing, healthcare and college.
Furthermore, those costs are rising rapidly and show no signs of slowing down. It may be more appropriate to plan for an amount that pays off the major debt, and then some.
What if you have a household without children, or what if your children are no longer dependent on your income? How much should your life insurance protect?
The biggest unknown for clients in this stage of their life is the cost of medical care and long term care. We are living longer and longer than our parents did. And even with the best health and long term care insurance on the planet, there could still be significant medical bills left to your family once you depart.
How do you think they are going to pay for that if the bills stack up to two, three, or even five hundred thousand dollars?
Have you ever heard the sad stories about families where all of their savings were eaten up by medical bills right at the end? How would you feel if that was your legacy?
What if you are the main breadwinner?
Many federal employees we work with are the main income source for their household, and their spouses and children also benefit from the health insurance through the Federal Employee Health Benefits (FEHB) Program. If this is your situation, what happens if you die before retirement?
Your family is in trouble, that's what happens.
Private health insurance is constantly listed as one of the highest expenses a family has to endure. So not only would they lose your income, but they would also need to find a very expensive private health insurance plan to replace your FEHB benefits.
For the best in family protection, consider your assets and asset gap.
Based on decades of advising clients and working with families in the aftermath of a death, may we suggest a better approach?
Think about the matter from the income your household would need, then plan for assets that meet those needs. With responsible financial advice, family assets would provide a nominal amount of income (4% - 5% per year) that the family could use to replace the missing income from a federal employee’s death.
So we plan to cover the most important expenses using this approach, then account for the assets that the client already has like savings, retirement accounts and their Thrift Savings Plan (TSP).
We just went through this exercise with a client earlier so we can use their example to prove the point. In this example, the client was a G-9 and was the sole breadwinner for their family. They were most concerned with keeping a roof over their family’s head, so we took an assets-forward approach accounting for the monthly mortgage, utilities and grocery bills.
Mortgage - $3,100
Utilities - $450
Groceries - $600
Assets in TSP - $225,000
In this example, the most critical bills amount to $4,150 per month, or $49,800 per year.
The calculation works like this:
Annual expenses divided by a reasonable safe interest rate (4%), minus current assets equals the asset gap to protect with life insurance.
$49,800 divided by 4% = $1,245,000 in total need. Once we account for the assets our client already had in their TSP, the remaining policy we needed was for about $1,000,000.
This makes absolutely sure their family is protected and leaves some cushion in the case of inflation.
For our client and in this case, FEGLI fell short by hundreds of thousands of dollars. If this is your situation, are you willing to settle for leaving your loved ones hundreds of thousands less than they need?
Why would we leave your family less than they need when the solution is so simple (and affordable)?
So just what is FEGLI in the first place?
FEGLI is the Federal Group Life Insurance program, and it was established in the 1950's to help government employees get life insurance coverage.
If you are a federal employee and would like to download the FEGLI handbook, be my guest. It's over 300 pages long and you can get a copy from OPM.
If you would like a basic refresher that is certainly NOT 300 pages long, please keep reading.
FEGLI has four pieces to its coverage. FEGLI Basic, Option A and Option B are for insurance protection on the individual, and Option C provides coverage for the individual's family.
You must be enrolled in FEGLI Basic to qualify for FEGLI Option A, and Option A provides an additional death benefit of up to $10,000 in coverage.
This is affordable protection, and it’s best to think of it as “funeral inflation protection.” In the very likely event that end of life expenses rise, FEGLI Option A can help cushion that burden. We usually recommend you keep this in place if you already have it. If you have not elected Option A coverage however, individual plans can provide you multiple options to handle future end of life expenses.
For an individual, FEGLI Option B is known as “supplemental coverage” because it covers up to five times your annual base pay.
First off, all FEGLI Option B rates will increase in cost every 5 years on your birthday. So at age 40, 45, 50, 55 and so on, you can expect a smaller paycheck right after the birthday celebration is finished. You really start to feel these increases after age 45 and the jump at 50 is significant. Then at age 55 the rates double, then at age 60 they more than double. If you would like to contribute to the federal government for a life insurance plan that only gets more expensive, you can. However, you probably qualify for better options with FEGLI Advisor.
Second, most financial experts recommend 10 - 15 times your annual salary in life insurance coverage, even more if you have kids, and even more if you are the breadwinner. FEGLI Basic plus everything you could get in Option B only gets you to six times your annual salary, it is just not enough. How would your family make up the difference if you died and they had to rely on less than they deserve?
Third, FEGLI Option B is not portable. With some group life insurance plans you could leave your employer and change your group coverage into an individual policy. With FEGLI, you can’t take any of it with you and if you don’t have individual life insurance, you could leave your family in a bind.
Fourth, if you are healthy, you are subsidizing the cost of the FEGLI Option B program for those who are not healthy. At age 50 and with the rate increases built in, FEGLI Option B is priced comparatively to a highly rated term policy on the individual market. People with significant health issues are the ones who receive highly rated policies at those prices in the open market. So if you have average or better health, you are paying extra for the rest of the group who is not in good health. Do you feel that is fair?
Fifth, FEGLI slowly starts to disappear in retirement (right when you need it) unless you elect to pay extra.
Sixth - forget living benefits. Most private life insurance companies allow you to take part or all of your death benefit if you are terminally ill, or if you have a serious health condition expected to result in death in the next 12 to 24 months. These benefits are known as ‘living benefits’ because you can access policy death benefits while you are alive. While FEGLI does have a provision for living benefits, it only exists for the FEGLI Basic coverage and only applies to 1x your salary. Furthermore, you have to have a terminal condition with a life expectancy of nine months or less, so this leaves you with fewer options than even the most basic private life insurance policy.
Finally, if the government has higher-than-expected death claims for the group like we experienced in 2021, they can raise rates on everyone with very little notice. They have changed the rates for the entire program multiple times in the past, and it stands to reason they will exercise higher rate increases in the future as well. Wouldn’t you rather have a policy that gives you more control?
FEGLI Option C is alternative coverage for the family members of the insured federal employee. It provides for up to $25,000 in life insurance for your spouse, and $12,500 in life insurance for each eligible child.
While individual plans provide more flexibility than FEGLI Option C, it is up to you to continue with the coverage or not. We find it has less value for families unless they have dependent children, however it is very valuable coverage if your spouse is otherwise uninsurable due to a serious health condition. Many clients take this approach: keep their Option C coverage in place until their children are grown, and then re-evaluate whether they need to keep it based on the health of the spouse.
FEGLI can be really confusing, and it’s hard to find individual advisors whose goal is your peace of mind. Choose a free benefit review with FEGLI Advisor, and in a few minutes you will know if your current FEGLI benefits have any gaps and whether an individual plan would better suit your needs.
We only work with the top financially rated life insurance companies in the industry, and we specialize in helping federal employees replace their FEGLI coverage where appropriate.
Why spend more than you have to for benefits that are subpar? Get three to four times the protection for the same amount you are currently committing to FEGLI, or dial in the perfect amount of life insurance for savings every month. Then rest easy knowing your family is protected with rates that stay locked in for as long as you want. No more surprises.
FEGLI Advisor provides you the choice to get the coverage that you deserve at a price you control, so schedule your complimentary benefit review today.
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