Fegli Life Insurance: Can You Sell It?

Federal Employees Group Life Insurance (FEGLI) policies can be sold for cash through a viatical or life settlement transaction. This can be done to quickly get cash for personal expenses, medical bills, or after leaving federal employment. The process is simple: fill out a form, talk with a trusted company, get an offer, and sign a contract. This gives you immediate financial support and stops your premium payments. If you’re a current or former federal employee, especially if you’re seriously ill or over 75, you might be eligible.

Who is eligible to sell a FEGLI policy?

Federal Employees Group Life Insurance (FEGLI) policies can be sold for cash through a viatical or life settlement transaction. However, eligibility depends on several factors.

Any current or former federal employee can sell their FEGLI policy. If you own a FEGLI policy and either have a serious illness or are over the age of 75, you may qualify to sell your FEGLI policy for cash. Some sources state that policyholders over the age of 65 may be eligible to cash in their policy, while others state that insured individuals under 65 with life-threatening health conditions may qualify.

The amount you can be paid from your FEGLI policy is based on the face value of the policy and your age and health. The death benefit of the policy must be $100,000 or more.

If you are a current or former federal employee, you can sell your FEGLI policy by filling out a form, talking with a trusted company, getting an offer, and signing a contract. This gives you immediate financial support and stops your premium payments.

What is the process of selling a FEGLI policy?

Federal Employees Group Life Insurance (FEGLI) policies can be sold for cash through a viatical or life settlement transaction. Any current or former federal employee can sell their FEGLI policy, especially if they have a serious illness or are over the age of 75.

The process of selling a FEGLI policy is straightforward:

Fill out a form:

You can start the process by filling out a form on a life settlement company's website. You will be asked to provide information about your policy and health status.

Receive an offer:

Once the company has received your completed form, they will contact you to ask any additional questions they need to provide an offer for your policy. The amount of this offer will depend on the face value of the policy and your age and health.

Sign a contract:

If you accept the offer, the company will send you a contract to sign. Once they receive the signed contract and your FEGLI payout is approved, they will send you the agreed amount.

It is important to note that there are specific qualifications to remember when selling your FEGLI policy. While any current or former federal employee can sell their policy, those who are over the age of 65 or have been diagnosed with a life-threatening illness may be eligible to receive a higher cash payout. Additionally, before retiring, it is recommended to review your FEGLI policy options to ensure you can sell it for the best price possible.

Pros and cons of selling a FEGLI policy

Federal Employees Group Life Insurance (FEGLI) policies can be sold for cash through a viatical or life settlement transaction. However, there are several factors to consider when deciding whether to sell a FEGLI policy.

Pros of Selling a FEGLI Policy

• It can provide quick cash for personal expenses, medical bills, or retirement funding.
• The policyholder no longer has to pay premiums, which can be beneficial if they can no longer afford them or don't want to pay cancellation fees.
• The cash settlement can help pay off debts or cover unexpected expenses.
• The policyholder can choose to sell all or just part of the FEGLI policy, ensuring that a portion is left for their family in case of any unforeseen events.

Cons of Selling a FEGLI Policy

• It can be challenging to find the right buyer for the policy, even with the help of a broker.
• The policyholder will not receive the full death benefit, and it is likely that they will lose most of it.
• There are broker fees and taxes associated with the sale, reducing the overall profit.
• Once the policy is sold, the beneficiaries will no longer receive a death benefit, and the coverage ends.
• Viatical settlement firms typically only purchase policies from individuals who are terminally or chronically ill, as there is no expectation of when they will receive the death benefit.

What are the tax consequences of selling a FEGLI policy?

Federal Employees Group Life Insurance (FEGLI) policies can be sold for cash through a viatical or life settlement transaction. However, in practice, only those who are terminally or chronically ill are likely to find a buyer. This is because the buyer would have no expectation of when they would receive the death benefit, so the amount they would be willing to pay would be close to zero.

The proceeds paid under a life insurance policy to the designated beneficiaries by reason of the insured individual’s death are generally excludable from the gross income of the beneficiary. The basic requirement for tax-free treatment of life insurance is that the proceeds are paid by reason of the death of the insured policyholder.

With respect to employer-sponsored life insurance such as FEGLI, an employer can provide its employees with up to $50,000 of employer-paid life insurance coverage without any federal and state income tax consequences to its employees. Any employer-paid portion of the premiums of the amount of life insurance above $50,000 is subject to federal income tax, Social Security (FICA) tax (up to the annual Social Security maximum wage base), and Medicare Part A (hospital insurance) payroll taxes.

The first $50,000 of group-term life insurance that an employer pays for on behalf of an employee is excluded from an employee’s taxable income. If an employer pays a portion or all of the premiums on behalf of an employee for more than $50,000 of term life insurance coverage, then the employer must include the excess coverage above $50,000 in the employee’s taxable income.

In the case of FEGLI, employees pay 2/3 of the premium cost for the FEGLI “Basic Insurance Amount” (BIA), and the agency pays the other 1/3. Employees pay the full premium cost for the three FEGLI optional coverages (Option A – Standard; Option B – Multiples of Salary, and Option C – Family Coverage) with no agency premium contribution.

Therefore, if you sell your FEGLI policy, the tax consequences will depend on the amount of coverage you have. If you have up to $50,000 of coverage, there will be no tax consequences. If you have more than $50,000 of coverage, the portion of the premiums paid by your agency on your BIA exceeding $50,000 will be converted to income and appear as taxable income on your W-2 statement.

What are the alternatives to selling a FEGLI policy?

Federal Employee Group Life Insurance (FEGLI) policies can be sold for cash through a viatical or life settlement transaction. However, there are some alternatives to selling a FEGLI policy.

Firstly, it is important to note that FEGLI is intended to provide a traditional death benefit. While this is a valuable feature, modern life insurance strategies have evolved to include powerful new features, such as Accelerated Living Benefit Riders, which protect the insured during their lifetime. These living benefit riders can help pay for qualifying medical emergencies or offset the cost of ageing concerns, such as nursing home care, while still providing a death benefit to your family. This approach offers more flexibility than FEGLI, allowing a single policy to address multiple needs without the added cost and hassle of buying multiple single-focus policies.

Secondly, for those who are in good health and/or over the age of 35, there may be more affordable life insurance options available outside of FEGLI. FEGLI Option B, in particular, has been criticised for its unannounced rate increases, which can make it unaffordable over time. By reviewing your FEGLI rates and consulting with a reputable life insurance agency or financial planner, you may be able to find lower rates and save a significant amount of money.

Thirdly, if you are a current or former federal employee who is no longer interested in maintaining your FEGLI policy, you may want to consider simply cancelling or allowing the policy to lapse. This option may be suitable if you no longer need the coverage or are unable to afford the premiums. However, it is important to carefully consider your needs and explore alternative coverage options before making any decisions.

Finally, another alternative to selling your FEGLI policy is to explore individual portable insurance with Living Benefits. This option allows you to design a customised insurance plan that fits your specific needs and circumstances. By asking yourself a few key questions, such as what you want your life insurance to protect and how long you will need protection, you can make an informed decision about whether to stay in FEGLI or explore individual coverage.

Frequently asked questions