Your Money and Your Life

In the summer heat, my thoughts have turned to cold, hard cash. I've already spent a few weeks writing about the Thrift Savings Plan -- including discussing the handful of people who've amassed $1 million or more in their accounts. So this week I thought I'd address the federal employees who are worth close to $1 million -- or at least several hundred thousand dollars -- in a different way.

These are the people enrolled in the Federal Employees Group Life Insurance program. According to the Office of Personnel Management, here's the number of employees who were enrolled in the various FEGLI plans, as of 2006:

According to CNNMoney.com's Ultimate Guide to Retirement, the purpose of life insurance is simply to make sure the people who depend on you are taken care of if you die prematurely: "Contrary to what all too many insurance agents will tell you, you almost certainly don't need to have life insurance for your entire life. You need it most when you're a young adult with young kids, when you have yet to build up assets that your family can fall back on if something happens to you. If you die while your children are still in diapers, where's the money going to come from to raise and educate them? Right: life insurance. Once they're grown up, you no longer need it."

That's pretty simple. Now let's look at some of the details of FEGLI to help you assess your options under the program.

The Basics

Most federal employees are automatically enrolled in FEGLI Basic, unless they waive this coverage. It's based on the annual rate of basic pay (including locality pay), rounded up to the nearest $1,000, plus $2,000. The government pays one-third of the premium and you pay two-thirds -- unless you work at the U.S. Postal Service, which pays the entire cost of Basic insurance for its employees. (Elsewhere, employees end up paying 15 cents per $1,000 of coverage.) FEGLI insurance does not build any cash value.

If you are under 45, you automatically have extra coverage without paying any additional premium. This extra benefit increases the amount of Basic insurance payable at the time of your death if you die before turning 45.

Optional Insurance

If you have Basic insurance, you also can add Optional coverage. But you must pay the full cost. There are three options:

• Option A provides $10,000 of coverage.
• Option B comes in one, two, three, four or five multiples of your annual basic pay rate.
• Option C insures your spouse and eligible dependent children. It also comes in multiples between one and five. Each multiple is equal to $5,000 for a spouse and $2,500 for each eligible dependent child.

Accidental death and dismemberment coverage is an automatic part of Basic and Option A, at no additional cost.

To find out how much coverage you have, look at a copy of your most recent Standard Form 50, Notification of Personnel Action. In Block 27 on that form, there's a two-character code representing your current coverage and a definition of the code. For example, if Block 27 shows "CO-Basic Only," that means you have Basic insurance with no optional coverage. You can look up the codes and their translation in OPM's FEGLI Handbook. Once you know the types of coverage you have chosen, you can use the FEGLI calculator to determine the current value of your insurance.

If you are a federal retiree or are receiving workers' compensation, you can request this information from OPM's Retirement Office by e-mailing retire@opm.gov or calling 888-767-6738.

The last FEGLI open enrollment was held in September 2004. The choices made during that time took effect in September 2005. You must have FEGLI coverage for the five years of service immediately before retiring or starting to receive workers' compensation benefits in order to continue that coverage as an annuitant or workers' comp beneficiary. The earliest most employees can retire and carry new coverage from the 2004 open season into retirement is Sept. 3, 2010.

For Your Consideration

There are a few things you should know about FEGLI as you evaluate your options:

• FEGLI Basic insurance includes a living benefit if you are diagnosed with a terminal illness. You can become your own beneficiary if you have a life expectancy of nine months or less.
• Basic is free once you're retired and over 65, unless you choose to pay additional premiums at retirement to prevent a 75 percent reduction to the benefit. If your kids are grown and your house will be paid off, then the remaining 25 percent of Basic can serve as a burial expense policy. The coverage will be based on your final salary rate when you retire and will not begin declining until after you are retired and turn 65.
• Option A has been available since 1968. I guess at that time $10,000 was equivalent to a decent federal salary. It's not nearly as valuable today. The only advantages to Option A are that it's free once you're retired and turn 65 (although the benefit gets cut to $2,500), and it includes an accidental death and dismemberment benefit at no additional charge.
• Option B is not cheap. It covers almost everyone, regardless of your health, but that coverage comes at a price. The cost of Option B increases by 50 percent at age 50 and doubles when you reach 55. It more than doubles at 60. If you think you need life insurance beyond Basic FEGLI, you might want to consider purchasing a private term insurance policy instead of enrolling in Option B. Here's what one employee says: "I am a healthy young adult under the age of 35. For me to get $483,000 worth of coverage through FEGLI, I'd pay $538 a year. I have quotes from two other insurance companies for about the same yearly premiums for 30-year terms, for $1 million worth of coverage! I'll be canceling FEGLI and wish I had figured this out sooner."
• Option C provides coverage for your family, no matter how big your family is. Even if you don't have any family members, you can continue to be enrolled in Option C. But if you no longer want it, you have to cancel it. Once you are retired, you will no longer be able to re-enroll in Option C (or any other part of FEGLI). If you would like to continue Option C as a retiree in case you acquire additional family members, you can do so. Be sure to notify OPM if you marry or acquire a child.
• FEGLI is not a substitute for choosing a spousal survivor benefit under either of the federal retirement systems. It's way too expensive to serve that purpose. A 60 year old would pay $312 per month for $240,000 of Option B coverage. At 65, that same coverage would cost $374 a month, and at 70, the price would jump to $624 a month. You don't even want to know what it would cost at 75 and beyond.

For more information about federal life insurance options, see OPM's FEGLI site.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.