Federal Life Insurance: A Good Deal Or Not?

Life insurance is an important investment to protect your loved ones in the event of your death. There are many types of life insurance, including term and whole life insurance, and it can be difficult to decide which one is right for you. Federal life insurance, also known as FEGLI (Federal Employee Group Life Insurance), is a type of group term insurance offered to employees of the US Federal Government. It is the largest group life insurance program in the world, covering over 4 million people in the United States. While it may be a good option for some, it's important to understand the basics of the program and compare it with other alternatives before making a decision. In this article, we will explore the pros and cons of FEGLI and discuss whether it is a good deal for federal employees.

Pros and cons of Federal Employee Group Life Insurance (FEGLI)

Federal Employees Group Life Insurance (FEGLI) 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. Here are some pros and cons of FEGLI:

Pros

• FEGLI is a group life insurance policy offered exclusively to federal employees.
• Employees are automatically enrolled in the "Basic" plan, which covers their salary (rounded up to the nearest thousand, plus $2,000) and is partially subsidised by the federal government. Postal workers receive the Basic amount for free.
• FEGLI offers term life insurance, which does not build up any cash, loan paid-up, or extended insurance equities.
• The Basic plan also includes accidental death insurance at no additional cost.
• FEGLI offers group rates and payroll deductions, and the government pays one-third of the cost of basic insurance.
• There is no medical exam or other limitations on participation, making it an attractive option for those with existing health conditions, poor driving records, or dangerous jobs.
• FEGLI offers optional life insurance in addition to basic coverage, with options to add $10,000 of insurance, multiples of your salary, or coverage for your spouse and dependent children.
• FEGLI is a good option for anyone who may be considered high-risk for life insurance due to a pre-existing condition.
• FEGLI allows reduced amounts in retirement, with the 75% reduction option resulting in a policy that has a face value of 25% of your ending Basic benefit with no premium after age 65.

Cons

• FEGLI rates on Option B and Option C increase every 5 years, so it may not make financial sense to keep FEGLI past age 50.
• You pay the full cost of optional insurance, and the cost depends on your age.
• FEGLI does not build up any cash value or paid-up value.
• You cannot get a loan by borrowing from FEGLI insurance.
• FEGLI may not be the cheapest life insurance policy or the best coverage option for everyone. It is important to consider your individual needs and circumstances.

FEGLI vs private life insurance

Federal Employee Group Life Insurance (FEGLI) is a type of term insurance that covers more than 4 million federal employees, making it one of the largest group life insurance programs in the world. It was started by the United States government in 1954 to provide life insurance for federal employees and their families. Employees of the US Federal Government are entitled to participate in certain benefits, programs, and investment opportunities not available to the general public.

FEGLI is a group life insurance policy that the federal government offers to its employees. New employees are automatically enrolled in FEGLI Basic, but they can choose to waive this enrollment and opt for private life insurance instead. Basic coverage includes accidental death insurance at no additional cost. FEGLI Basic is free for postal workers and partially subsidised by the federal government for other federal employees.

There are four term life insurance policy options under FEGLI:

• Basic: Coverage is equal to the amount of the employee's annual salary, rounded up to the next thousand, plus $2,000.
• Option A: $10,000 of coverage, mostly used to cover funeral, burial, or final expenses.
• Option B: A flexible policy that allows the employee to determine the amount of coverage, ranging from 1-5 times the amount of their annual salary.
• Option C: A flexible coverage plan that also ranges from 1-5 times the employee's annual salary and can include the employee's spouse and children.

FEGLI rates on Options B and C increase every 5 years, whereas term life insurance rates are fixed for the term. Age 50 is when government employees will start noticing a big difference in FEGLI life insurance rates.

Private life insurance is available to anyone, not just federal employees, and can be purchased from insurance companies. It is more expensive than FEGLI but provides more extensive coverage. Private life insurance is ideal for those who require tailored financial protection. It is also a good option for federal employees who are healthy and need a higher level of coverage.

Private term life insurance is customizable and can be tailored to meet an individual's specific needs. It provides higher coverage per dollar and more extensive benefits. It can be continued after the term or converted to a permanent insurance policy.

FEGLI Pros:

• Affordability: Low or no-cost options for federal employees.
• Automatic Enrollment: Convenience with automatic enrollment for federal employees.
• Basic Coverage: Offers sufficient coverage for individuals with minimal insurance needs.

FEGLI Cons:

• Limited Coverage: Coverage amount may be lower than what is needed for comprehensive financial protection.
• Restricted to Federal Employees: Only available to federal employees.
• No Cash Value: Does not accumulate cash value over time.

Private Term Life Insurance Pros:

• Extensive Coverage: Provides higher coverage amounts, suitable for significant financial obligations.
• Flexibility: Policies are customizable to fit individual insurance needs.
• Availability: Accessible to everyone, not just federal employees.

Private Term Life Insurance Cons:

• Higher Costs: More expensive than FEGLI, especially for higher coverage amounts.
• No Cash Value: Does not build cash value, just like FEGLI.
• Term Limitations: Coverage is only for a specified term, not for life.

In conclusion, federal employees can choose between FEGLI and private term life insurance, or even a combination of both, depending on their individual needs and circumstances. FEGLI is ideal for those who need basic coverage, while private term life insurance is better suited for those requiring tailored financial protection.

How much life insurance do you need?

How much life insurance you need depends on your unique circumstances. Your savings, debts, income, family situation, and financial obligations all play a role in determining the right amount of coverage. Here are some methods to calculate how much life insurance you need:

• Income replacement method: This approach is based on your current income. Recommendations vary from 10-12 times your salary for someone with a young family to a lower multiple as you age and your family situation changes.
• Actual needs method: This involves adding up the specific expenses that the insurance should cover, such as credit card and other debt, children's education, income supplement for a spouse, and funding a spouse's retirement account.
• Multiply income by 10: This guideline suggests that you multiply your income by 10 to get a quick estimate of your life insurance needs. However, it doesn't consider your savings, existing policies, or the needs of a stay-at-home parent.
• DIME formula: This formula takes into account Debt, Income, Mortgage, and Education. It provides a more comprehensive view of your financial obligations but doesn't factor in existing life insurance coverage or savings.
• Replace income plus a cushion: This method involves buying enough coverage to replace your income, allowing your beneficiaries to invest the payout and use the income generated to cover expenses.

When deciding on the amount of life insurance, it's important to consider your long-term financial obligations, such as mortgage payments or college fees, and subtract your assets. You can use online calculators or consult a financial professional to help determine the appropriate amount of coverage based on your individual circumstances.

Different types of life insurance

Federal Employee Group Life Insurance (FEGLI) is a type of group term insurance policy offered to employees of the US Federal Government. It is not whole life insurance and does not build cash value. FEGLI offers four term life insurance policy options:

• Basic: Coverage equal to the amount of the employee's annual salary rounded up to the next thousand, plus $2,000. Postal workers receive Basic coverage for free.
• Option A: $10,000 of coverage, mostly used for final expenses.
• Option B: Flexible coverage ranging from 1-5 times the employee's annual salary.
• Option C: Flexible coverage for the employee's spouse and children, ranging from 1-5 times the employee's annual salary.

Now, here is an overview of the different types of life insurance:

Term Life Insurance

Term life insurance is the simplest and least expensive type of life insurance. It is typically sold in lengths of one, five, 10, 15, 20, 25, or 30 years. Coverage amounts vary depending on the policy but can go into the millions. Most people buy term life insurance for a length long enough to cover their prime working years. That way, if they die early, their beneficiaries can meet short-term financial needs like paying off a mortgage or supporting their children through college.

Term life insurance is often the cheapest option, but if the policyholder outlives the policy, their beneficiaries won't receive a payout.

Whole Life Insurance

Whole life insurance is the most expensive type of insurance, designed to last the policyholder's entire lifetime. As long as the premiums are paid, the beneficiary will receive the face value at the policyholder's death, regardless of their age. Whole life insurance builds cash value over time, which can be utilized by the policyholder during their life or added to the death benefit. The cash value earns a fixed interest rate set in the contract.

Universal Life Insurance

Universal life insurance is similar to whole life insurance, but the premiums can vary depending on the policyholder's ability and desire to pay. Cash value is built up in the early years if premiums are sufficiently high and can be used later to help pay for the increasing cost of insurance within the contract. This type of insurance is the most flexible in terms of payments but can be expensive to maintain in later years.

Variable Life Insurance

Variable life insurance is a variation of universal life insurance that allows the accumulated cash value in the contract to be invested according to the policyholder's wishes. The investments are selected from available insurance company-managed subaccounts and function similarly to mutual funds.

Burial or Final Expense Insurance

Also known as final expense insurance, burial insurance is a small whole life insurance policy meant to help cover the policyholder's funeral, burial, and other end-of-life expenses. The death benefit typically ranges from $5,000 to $25,000, and a medical exam is usually not required, making it more accessible to seniors with pre-existing health conditions.

Group Life Insurance

Group life insurance is typically offered by employers as part of their benefits packages. Premiums are based on the group as a whole rather than each individual. Employers usually offer basic coverage for free, with the option to purchase supplemental life insurance if needed.

Mortgage Life Insurance

Mortgage life insurance covers the current balance of the policyholder's mortgage and pays out to the lender, not the policyholder's family, if they die.

Credit Life Insurance

Credit life insurance pays the balance of a specific loan, such as a home equity loan, if the policyholder dies. It is often offered by banks when a customer takes out a loan.

Accidental Death and Dismemberment Insurance (AD&D)

AD&D insurance covers the policyholder if they die in an accident, such as a car crash. It also pays out for the loss of limbs, sight, or hearing but is usually only offered through the workplace.

Joint Life Insurance

Joint life insurance insures two lives, usually spouses, under one policy. There are two types: first-to-die and second-to-die. The first pays out after the first policyholder dies, and the second pays out after both policyholders die.

When to consider alternatives to FEGLI

Federal Employees' Group Life Insurance (FEGLI) is a term life insurance program available to federal employees, providing basic coverage and optional additional coverage. While it is the default life insurance option for federal employees, it is not the only option available. Here are some scenarios when you may want to consider alternatives to FEGLI:

• Limited Coverage: The maximum coverage under FEGLI is typically around six times an employee's annual salary, which may be insufficient for families with higher income replacement needs or more extensive financial obligations. If you require more extensive coverage, you may want to explore private life insurance alternatives that offer higher coverage limits.
• Increasing Premiums: FEGLI premiums increase with age, and the cost can become significantly more expensive in retirement, especially for those over age 50. If you anticipate needing coverage well into retirement, alternative options with level premiums or more affordable rates may be more suitable.
• No Cash Value: Unlike whole life insurance, FEGLI policies do not accumulate cash value over time. This means that you cannot borrow against the policy or withdraw funds for other financial needs. If you are interested in the cash value growth aspect of whole life insurance to supplement retirement income or for other investments, then alternatives to FEGLI should be considered.
• Lack of Flexibility: FEGLI offers limited options for customizing coverage to meet individual needs. If you have specific requirements or prefer more flexibility in your policy, private life insurance alternatives may provide a wider range of options and riders to tailor the coverage to your unique circumstances.
• Decreased Retirement Coverage: While FEGLI offers the option to continue coverage after retirement, the coverage amounts, particularly for the Basic plan, decrease substantially. If you are seeking more comprehensive coverage that extends well into your retirement years, alternatives to FEGLI may be worth exploring.
• No Conversion Privileges: FEGLI does not offer the option to convert your term life insurance policy into a permanent product. If you prefer the benefits and flexibility associated with permanent life insurance, such as the ability to leverage your policy beyond the standard term, you may want to consider alternatives to FEGLI.
• Health and Lifestyle Considerations: If you are in good health and have a healthy lifestyle, you may find that private life insurance alternatives offer more competitive rates and comprehensive coverage. FEGLI may be more suitable for those with existing health conditions or risky occupations who might face higher premiums or eligibility challenges in the private market.

It is important to carefully assess your long-term financial goals, coverage needs, and budget when considering alternatives to FEGLI. Consulting with a financial advisor or insurance professional who specializes in federal benefits can help you navigate these important decisions and ensure your life insurance coverage aligns with your overall financial strategy.

Frequently asked questions