Jeff: Today we're going to talk about your FEGLI, your Federal Employee Group Life Insurance.
Linda: What is FEGLI? It is a group term life insurance that was established August 29, 1954. It is the largest group policy in the world, covering over 4 million federal employees and postal employees and annuitants.
Jeff: OPM administers the program. They set the premiums, and they have contracted this out through MetLife, and you know, you have your Basic life insurance. That's automatically issued to you while you're working when you're first hired. Then you would have to have chosen Options A, B, and C as well. So we'll go over each one of those and how they work while you're working and when you retire.
Linda: Some common questions that federal employees have are what?
Jeff: You know, a lot of people wonder, what is the total coverage? A lot of people don't even know what they have through the government. You know, when they're hired on they have a big stack of papers they fill out. No one's really there explaining how this is going to work. So a lot of times people just max it out and they don't even know why. You know, a lot of people wonder how the price is going to increase. Why does it keep increasing? Am I going to be able to keep my coverage throughout retirement?
Jeff: And what can I do to supplement that?
Linda: So for today's example, we're going to use a federal employee with an annual income of $84,500. Their current age is 45, and retiring at age 60. Now, we're going to use a life expectancy that's up to 85 and we're going to use all the FEGLI options as if we maxed them out. So tell me a little bit, Jeff, about what your Basic is.
Jeff: So like I said earlier, every eligible employee is automatically enrolled into the Basic unless you waived it when you were hired on or if you've canceled it since. The cost of it's very cheap. The government actually pays for a third of it for you while you're working. So you know, 15 cents per thousand is pretty cheap. It is free for postal employees. That's a pretty nice benefit there.
What they do is, they take your annual salary, they round it up to the nearest $1,000 and add $2,000 to it, so that's why it reflects a little bit higher than your actual salary. And you also have an extra benefit if you're age 35 and younger. The coverage basically doubles for you. And once you do turn 36, it starts to reduce 10% each year, and then it will bottom down after 10 years. So if we look at the chart on the Extra Benefit, and like I said, it doubles and it will reduce 10% a year. There's no extra cost for that. That's actually built in for free, so it's a pretty good deal on that. So after the reduction does take place, then this is what your Basic insurance will look like.
Jeff: So after the extra benefit goes away, this is what your Basic life insurance will look like, the cost of it, for the rest of your working career.
Linda: So one of our questions was, what is it going to do at retirement?
Jeff: That's a great question. At retirement, basically you have three different options. You have a 75% Reduction Option, which that's the default setting. So if you don't choose anything at retirement, that's what will take place. That's also known as the Free Option. You have a 50% Reduction where you basically keep half of your coverage. And you have a no reduction where you maintain your full coverage. So let's take this column by column, because they're each totally different.
The 75% Reduction, we like to call that the Free Option. If you retire before 65, the cost remains the same while you were working. You keep your coverage. Once you turn 65 or when you retire, whichever comes later, then it's free, but that's when the reduction starts to take place. It has a little formula. It'll reduce 2% a month. After 50 months, or four years and two months, it will have then reduced a total of 75%.
Linda: Okay, so I get to keep 25% of my coverage?
Jeff: For free, forever. So if that's all you need in life insurance, then you have that. Now, the 50% Reduction, if you retire before 65 this price will jump up now to $90.05. Once you do turn 65 or when you retire, whichever is later, the price will drop a little bit to $61.77. Then you maintain 50% of your coverage.
The No Reduction Option, keep your full coverage, if you retire before 65 the cost is $213.59 per month. It's a pretty dramatic increase. Once you do turn 65 or when you retire, the price is a little cheaper. It drops down to $185.31, and then you maintain your full $87,000 in life insurance for the rest of your life for that same cost.
Linda: Okay, Jeff. Now you have two boxes there where it shows me a free coverage of $21,750.
Jeff: That's right. You notice in each example, once you do turn 65, the price drops a little bit because that's that free portion that kicks in.
Linda: So you're telling me, I'm paying $61.77 for only $21,750 in coverage?
Jeff: That's correct, because you're getting the other $21,750 for free.
Linda: So, as a federal employee if I select the 75% Reduction and realize that $21,750 is not enough life insurance for me, what are my options? How can I supplement that while I'm working?
Jeff: Well, the best thing to do is do something about it now before you retire, because once you retire it is hard to get life insurance. And that's where we come in and help on that. Basically, what we recommend in lieu of that…this is an example of keeping your No Reduction, your full coverage for the rest of your life; and this is paying for it for 40 years here because we've got life expectancy at 85. You see while you're working it's very cheap, but we're going to retire and the price is going to change. So over a 40 year period, you're now paying over $62,000.
This is how we can help. This is just an example. Everyone's different, but while you're working, you have your Basic life insurance, and you keep the free option when you retire. Now, United Benefits option, if you locked in an $87,000 policy, and we just did that to compare to what you have through the government. The price will never change at $78 a month, and your coverage never changes. So while you're working, we can double your coverage, and when you retire you have a lot more coverage and you've only paid just over $44,000 for it. You literally had a savings of over $18,000.
Linda: So, Jeff, you're telling my option now is to get coverage, and I can get double the coverage while I'm working, keep coverage when I retire, and still save $18,000?
Jeff: You can. I mean, that's a pretty significant savings. Increasing your coverage and saving money?
Linda: So, Jeff, Option A. Explain that.
Jeff: You know, it's very cheap while you're working. It's not much coverage, and basically when you retire or when you turn 65, whichever's later, it becomes free and it reduces 75% down to $2,500.
Jeff: No other option on that. So basically, over this example over this career, they spent $1,274 to have a $2,500 policy.
Linda: Our Option B, this is the five times your pay. Explain that to me.
Jeff: That's right. Well, first of all, you have to have the Basic in order to have this, just like all the options. But this will allow you to do up to one to five times your salary.
Jeff: This is really based off of term insurance. You know, the reason you would have this is if you needed term insurance.
Jeff: Basically, like I said, one to five times. They round your salary up to the nearest $1,000. In this example, times five, that'll give you the amount of $425,000. This is a five year renewable term. So that means every five years, your cost will increase.
Jeff: So basically, let's look at this chart. If your birthday ends in a zero or a five – or your age, anyway – every five years that's when it goes up.
Jeff: And it's not that bad. You know, the younger you are, it's not that bad; but as you age it gets very expensive.
Linda: I see. At age 60 it jumps up pretty significantly.
Jeff: Yeah. Even at age 55, that's when it almost doubles. Then it more than doubles at 60. So that's when it gets very expensive. Before you retire, you must choose an option on this. If you choose the full reduction, which is the default setting, unlike the other two options that we looked at, they reduce 75%, this will reduce 100%. You do not maintain any portion of this for free.
Linda: Why is it important to have my Option B while I'm working?
Jeff: Well, you may have a family or a mortgage on your home, so that's just really the purpose of term insurance, to cover you while you need it. And if you wanted to maintain your full coverage, if we look at that far right column on the no reduction, the cost will still increase every five years until you're age 85.
Linda: Wow, so you're telling me my monthly cost is going to be $2,860 at age 80?
Jeff: That's right, Linda.
Linda: That's crazy.
Jeff: That is an arm and a leg.
Linda: So what can I do to save money?
Jeff: Well, what we recommend on this, if you're paying for this because you need it, we can certainly save you money by locking in a term policy.
Jeff: Let's look at this. While you're working Option B, no reduction cost. If you continue to pay for this into retirement, look at the cumulative cost there: over $128,000.
Jeff: All right, let's see how we could help on that. Now, let's look if you locked in a 30-year term at age 45 with United Benefits. We have two different rates right here we're showing: a standard and a preferred, and that basically depends on your health on what price you're going to get. Obviously, the healthier you are, the better the price is. But either way, you lock in the price and it does not change for 30 years, so there's no rate increases.
Linda: Okay. That's nice.
Jeff: So look at this. Over 30 years, you're talking about saving between $90 and $105,000.
Linda: For the same amount of coverage?
Jeff: For the same amount of coverage.
Linda: If I get the coverage today at 45.
Jeff: That's right. And that's the key. The sooner you do it, the more you save.
Linda: Now, this is my last option as a federal employee. Explain what my Option C is.
Jeff: Option C is your family coverage. That allows you to insure your spouse and your children.
Jeff: You have to be enrolled into the Basic to elect any of the options, you know: Option C, of course. Like I said, you can insure your spouse and your children up to age 22– unless you have a child with special needs, then you're able to maintain coverage on him or her. But otherwise your children automatically drop off at 22.
Linda: Am I informed that they drop off?
Jeff: No you're not. They just become ineligible to be covered anymore. Now, you can insure your spouse up to $25,000 and you can insure your children up to $12,500. Those are the maximums. This cost does increase every five years, as well. It's not too drastic, but let's take a look at the chart. These are bi-weekly costs, and it's based off of your age, not your spouse's age.
Jeff: It's one rate no matter how many family members you have covered.
Jeff: If you only have one child or just a spouse or 10 children, it's the same rate. Before you retire, you must choose an option into retirement.
Jeff: You know, you can either choose to keep it all, or you can do the Free Option and you'll lose 100% of it.
Linda: $25,000 is not a lot of coverage for my spouse, so what can I do to get more coverage?
Jeff: The best thing to do is to contact United Benefits to see how we can help you. We have specifically designed programs for your spouses and for your children and grandchildren that you can lock in a rate with no physical that they never come off of. Keep the same price, keep the same coverage forever.
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