Life Insurance: Government's Role And Your Options

Life insurance is a contract between an insurance company and a policy owner, where the insurer guarantees to pay a sum of money to one or more named beneficiaries when the insured person dies. While it is not mandatory for individuals to have life insurance, governments in some countries, like the US and Canada, offer life insurance programs for federal employees and veterans. In the US, the Federal Employees' Group Life Insurance (FEGLI) Program is the largest group life insurance program in the world, covering over 4 million federal employees, retirees, and their family members. On the other hand, Canada offers life insurance programs that provide permanent and term life insurance options for its citizens.

Federal Employees' Group Life Insurance (FEGLI) Program

The Federal Employees' Group Life Insurance (FEGLI) Program was established by the Federal Government on August 29, 1954. It 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.

Most employees are eligible for FEGLI coverage. FEGLI provides group term life insurance, which does not build up any cash value or paid-up value. It consists of Basic life insurance coverage and three options. In most cases, if you are a new Federal employee, you are automatically covered by Basic life insurance and your payroll office deducts premiums from your paycheck unless you waive the coverage. In addition to the Basic, there are three forms of Optional insurance you can elect. You must have Basic insurance to elect any of the options. Unlike Basic, enrollment in Optional insurance is not automatic — you must take action to elect the options.

The cost of Basic insurance is shared between the employee and the Government. The employee pays 2/3 of the total cost, while the Government pays 1/3. The employee's age does not affect the cost of Basic insurance. However, the cost of Optional insurance is paid in full by the employee, and it depends on their age.

The Office of Federal Employees' Group Life Insurance (OFEGLI), a private entity contracted with the Federal Government, processes and pays claims under the FEGLI Program. The FEGLI Calculator is a tool that allows employees to determine the face value of various combinations of FEGLI coverage, calculate premiums for different coverage combinations, and see how choosing different options can change the amount of life insurance and the premium withholdings.

Basic Life Insurance under the FEGLI Program is equal to the actual rate of annual basic pay (rounded to the next $1,000) plus $2,000, or $10,000, whichever is greater. Additionally, there is an Extra Benefit for employees under age 45: double life insurance benefits until age 36, decreasing at 10% per year until age 45.

Optional insurance coverage under FEGLI includes Option A - Standard, which provides $10,000 of coverage, doubling in the case of accidental death, and Option B - Additional, which provides one to five multiples of pay. Option C - Family, insures an employee's eligible family members, with each multiple equal to $5,000 upon the death of a spouse and $2,500 upon the death of an eligible child.

Federal retirees may have FEGLI coverage if they met the requirements to carry it into retirement. The FEGLI Program has experience with emergency situations and will apply expedited procedures when necessary.

United States Government Life Insurance (USGLI)

In 1917, the United States entered World War I against Germany. At the time, commercial life insurance companies either excluded protection against war-related hazards or charged premiums that were much higher than normal rates. As a result, Congress approved the issuance of Government life insurance to service members under the War Risk Insurance program. This program included United States Government Life Insurance (USGLI), which was established in 1919 to manage World War I policies and new policies issued thereafter.

USGLI was designed to support American soldiers who may have struggled to obtain affordable life insurance from private insurers due to the high risk of injury or death associated with their occupation. The program provided all active military personnel with a life insurance policy payable by the federal government in the event of death or disability caused by war. The maximum face amount of a USGLI policy was $10,000, and policies were issued as permanent plans or renewable term insurance.

USGLI was closed to new issues on April 25, 1951, but existing policies could be retained by the insured even after their military service ended. As of 1983, all USGLI policies have been paid-up, meaning no further premium payments are due, and annual dividends continue to be paid. Today, there is just one USGLI policy still in force.

The successor to the USGLI program is the Service Member Group Life Insurance program, which offers insurance coverage to United States military personnel for the duration of their service, with premiums deducted from their regular pay.

Life insurance for couples

Life insurance for married couples can help provide financial security for your family. If you’re married, you can choose two separate policies or a joint policy to help meet your goals. Here are some things to consider when deciding on a life insurance plan for you and your partner.

Joint Life Insurance Policies

Joint life insurance policies cover both spouses. This type of policy is a good option if you want to save money on insurance premiums and protect your assets from taxes after you pass away. There are two types of joint policies: first-to-die policies and second-to-die policies. With first-to-die joint life insurance, the surviving spouse will collect the death benefit after the first spouse dies. A second-to-die or survivorship policy is when the beneficiaries receive the death benefit once both spouses pass away. Survivorship policies are generally used by wealthy couples who want to ensure their heirs have money to pay estate or inheritance taxes.

Separate Life Insurance Policies

A separate life insurance policy will only cover one spouse. If that spouse passes away, it will pay out a death benefit to the surviving partner. By investing in separate life insurance policies, each spouse can focus on their unique needs. For example, if one partner is the primary earner, life insurance can help protect your family financially and allow them to continue with their lifestyle in the event that the primary earner passes away.

When to Get Life Insurance as a Couple

• One partner is the primary earner
• You have debts, such as a mortgage, car payments, or student loans
• You want to manage living expenses, such as a mortgage, utilities, and groceries
• You want to cover final expenses, such as funeral costs and medical bills

Best Type of Life Insurance for Couples

The ideal life insurance plan for married couples depends on your particular needs. If you’re looking for a more favorable premium option and only need coverage for a set amount of time, term life insurance is worth considering. On the other hand, if you prefer the idea of lifelong coverage and a cash value component that may earn interest over time, a permanent policy like whole life insurance may be a better option.

Advantages of Joint Life Insurance for Couples

• Cost: Since a joint policy covers two people, it generally costs less than two separate policies.
• Coverage: If one spouse is unable to secure coverage due to poor health or an underlying medical condition, a joint policy can cover them both under a single policy.
• Builds cash value: A portion of your premium payment goes towards the cost of life insurance, while the remainder is applied to the cash value. The growth in cash value is federal tax-deferred, and over time it can be accessed for various personal needs.
• Customizable: You can customize your policy by purchasing riders, which allow the actual coverage to fit your unique situation.

Disadvantages of Joint Life Insurance for Couples

One potential disadvantage of joint life insurance policies is that they may not offer as much coverage as two separate policies. Additionally, joint policies may not be as flexible as separate policies, as they typically cover both spouses under the same terms and conditions.

In conclusion, life insurance for couples can provide financial security and peace of mind for married partners and their families. When deciding on a life insurance plan, it's important to consider your individual needs, financial goals, and budget to determine the best option for you and your partner.

Naming a beneficiary

There are two types of beneficiaries: primary and contingent. A primary beneficiary is the person or persons first in line to receive the death benefit from your life insurance policy. Typically, this is a spouse, child, or other family member. A contingent beneficiary is a backup person who will receive the death benefit if the primary beneficiary dies before or at the same time as the insured person.

It is not mandatory to name a beneficiary, but it is usually the reason people buy life insurance in the first place—to provide a benefit to the people they care about. If you don't name a beneficiary, it may be unclear who is entitled to the funds, which can delay the benefit payment. In the case of retirement accounts, your assets will likely be held in probate—a legal process where a court has to sort out your financial situation and determine how to distribute your assets.

Most financial services companies provide a form or website for you to designate your beneficiary. When naming your beneficiary, be as specific as possible. Most beneficiary designations will require you to provide a person's full legal name and their relationship to you. Some designations also include information such as mailing address, email, phone number, date of birth, and Social Security number.

You can name almost anyone as a beneficiary, including a charity, a trust, or your estate. However, make sure to research your state's laws before naming your beneficiary, as there may be restrictions. For example, in certain states, you may be required to list your spouse as your primary beneficiary.

It is important to keep your beneficiary designations up to date, especially after major life changes such as marriage, children, or divorce. You can change your beneficiary at any time, although the process may be more complex if you have irrevocable beneficiaries, in which case you will need their consent to make changes.

Cancelling your insurance

Cancelling your life insurance policy is a significant decision and can arise due to various reasons. It is important to understand the process to ensure you don't face unexpected consequences. Here is a detailed and direct guide on cancelling your insurance:

Understanding the Basics

Before cancelling your life insurance, it is crucial to know the different types of policies available. The two main types are permanent and term life insurance. Permanent life insurance policies, such as whole or universal life, are designed to provide coverage for life and often include a cash value component. Term life insurance, on the other hand, only covers you for a specific term, such as 10, 20, or 30 years.

Reasons for Cancellation

There are several valid reasons why you might want to cancel your life insurance policy. One common reason is a change in your financial situation, making the premiums unaffordable. You may have also secured a better policy with more favourable terms or reached a life stage where the coverage is no longer necessary, such as having adult children who are financially independent.

Timing of Cancellation

The timing of your cancellation can impact the process and any potential fees or refunds. If you have recently purchased a policy, you are likely within the "free look" period, which typically lasts 10 to 30 days and allows you to cancel without any financial penalty and receive a full refund of premiums paid. Cancelling outside of this period may result in surrender charges, especially for permanent policies.

Cancelling Term Life Insurance

Cancelling term life insurance is generally a straightforward process. One way to cancel is by simply stopping your premium payments. If you have set up automatic payments, you will need to contact your insurance company to end these transfers. It is recommended to directly call your insurance carrier to confirm the cancellation and ensure there are no further obligations.

Cancelling Permanent Life Insurance

Cancelling a permanent life insurance policy is more complex due to the cash value component. When you surrender a permanent policy, you may receive a payout from the cash value, but this will likely be reduced by surrender charges, especially in the early years of the policy. Any outstanding policy loans will also be deducted from the surrender value.

Alternatives to Cancellation

Before cancelling your life insurance, it is worth exploring alternatives. For term policies, you may be able to convert to a permanent policy without a new medical exam. For permanent policies, you can use the accumulated cash value to cover premiums or consider a tax-free exchange to a new policy or annuity.

Final Thoughts

Cancelling your life insurance policy should be a well-informed decision. Ensure you understand the financial implications and explore all your options before proceeding. It is also crucial to view life insurance as part of your broader financial strategy and assess whether there are alternative ways to meet your financial goals.

Frequently asked questions