Let’s start with life insurance coverage.
The Federal Employees Group Life Insurance program is not necessarily the best deal in town for buying term life insurance. Some federal employees can qualify for insurance at lower rates than FEGLI offers. Also, life insurance needs change over time -- children grow up and become independent, mortgages are paid down and retirement benefits build up. All of these may be good reasons to consider reducing your life insurance coverage.
Federal employees are automatically enrolled in FEGLI basic life insurance when they are first hired. Most feds also can add Option A (an additional $10,000 in coverage), Option B (based on multiples of your basic pay, up to five times your annual rate), and Option C (coverage for your spouse and dependent children).
Option B is the one to be careful about. It costs $.08 per $1,000 of coverage biweekly for an employee between the ages of 45-49. So an employee carrying $300,000 of coverage would pay $24 biweekly, or $52 a month. A 20-year level-term insurance policy worth $300,000 sold in the private sector can cost as little as $20-$30 per month for a preferred candidate ages 45-49. What’s more, when you purchase a level-term policy, in 20 years that policy will have the same premium. But under FEGLI, it will cost $403 monthly to maintain this same level of coverage for those ages 65-69.
The rate for a private insurance policy will be based on other factors besides your age: Women tend to get lower rates than men, nonsmokers less than smokers, and of course, pre-existing medical conditions also factor into the premium. Before you cancel your FEGLI coverage to buy a private policy, make sure the policy you are considering actually will cost the price you were quoted after the insurance company does its underwriting -- the process of evaluating your insurability to determine the financial risk the insurance company is taking. If you don’t pass the underwriting, then you may have to pay much higher rates -- or not be covered at all.
To make a good cost comparison, check your leave and earnings statement to see how much is being deducted from your biweekly salary (or your monthly annuity payment if you are retired) for FEGLI coverage. The Office of Personnel Management, which administers the FEGLI program, has a frequently asked questions section on its website to help you determine how much coverage you have based on your premiums or the insurance code that appears on your pay statement.
Before you decide to cancel FEGLI in lieu of a private insurance policy, it’s important to remember the following about FEGLI:
- When you have a life event (marriage, death, divorce, birth or adoption of a child), you are eligible to enroll in FEGLI or increase your coverage, regardless of your overall health or pre-existing medical conditions.
- You can cancel or reduce your coverage at any time as long as you have not “assigned” your coverage.
- As your salary increases, the amount of your coverage increases, since Basic FEGLI and Option B are based on your basic pay rate.
- As you grow older, Optional FEGLI coverage premiums increase. Every five years, the price of optional FEGLI will go up, with little warning other than less money in your paycheck.
- FEGLI pays your beneficiary, regardless of the cause of your death -- unless your beneficiary intentionally caused your death.
- You can continue FEGLI coverage in retirement and the value is based on the coverage in effect for the five years before your retirement.
- When you are retired and older than 65, you can continue to pay premiums to maintain your FEGLI coverage, or you can allow the coverage to scale back automatically. Basic and Option A coverage will reduce by 75 percent, but you won’t have to pay any additional premiums. Option B and Option C will reduce to nothing if you choose a “full reduction” after retirement.
If you are interested in comparing prices on private term insurance, here are some places to look:
- SAMBA Term Life Insurance Plan
- WAEPA (Worldwide Assurance for Employees of Public Agencies)