Why your federal benefits may not protect your family the way you think

Federal employment comes with benefits that many Americans envy, including stability, a steady paycheck, a pension, health insurance, life insurance and survivor benefits. On paper, it looks like a solid picture.

But, when Mark, a 52-year-old federal employee with more than two decades of service, passed away unexpectedly, his wife assumed the benefits they’d discussed over the years would carry her through. 

What she didn’t realize, until weeks later, was how much it depended on elections made years earlier and forms that hadn’t been revisited since their children were in elementary school. Life insurance covered immediate expenses, but not long-term income. The pension survivor benefit was smaller than she expected. The TSP beneficiary form hadn’t been updated after a refinance and name change.

There wasn’t anything that was “wrong.” The plan just hadn’t kept up with life.

But here’s what many federal employees only learn after something goes wrong. Your benefits were designed to support you but not fully protect your family if something happens to you. That gap is where plans stop being theoretical and need to be fully ready to step in if life happens. Stories like Mark’s are more common than many federal employees realize, and they usually don’t involve mistakes, just assumptions.

Why “I’m covered” is usually an assumption

Most federal employees assume their benefits will “take care of things” if they die unexpectedly, become disabled or retire earlier than planned. It’s not a reckless assumption, but a reasonable one. After all, the federal government offers more benefits than most private employers. The problem is that they’re often misunderstood, incomplete or dependent on choices you may not have revisited in years.

FEGLI: Helpful, but rarely enough

Federal Employees’ Group Life Insurance is one of the most misunderstood benefits in the federal system. Though you do have life insurance, it may not be enough.

Basic FEGLI typically equals your salary rounded up to the nearest $1,000, plus $2,000. For many employees, that means $70,000–$100,000 in coverage.

For most families, that amount doesn’t replace your income for very long. 

Optional FEGLI coverage can help, but premiums increase sharply with age. Many employees quietly reduce or drop coverage later in their careers because it becomes expensive and often without replacing it. It feels like coverage, but when it’s tested, there may be a gap that’s quickly uncovered.

Survivor benefits offer real protection, but often misunderstood

When a federal employee dies while still working, survivors are not left without support. In fact, federal survivor benefits can be meaningful and substantial.

For many families, benefits may include a Basic Employee Death Benefit. This is a lump sum equal to 50% of the employee’s final salary (or high-3 average) plus an additional fixed amount, along with the potential for a survivor annuity, continued health insurance coverage (Federal Employee Health Benefits) and any FEGLI life insurance in place. These benefits are administered through the Office of Personnel Management and are designed to provide immediate and ongoing financial support.

Where families are often surprised isn’t whether benefits exist. It’s how those benefits are paid, how long they last and whether they truly replace the income that was lost.

The BEDB, for example, is a one-time benefit. Survivor annuities may provide ongoing income, but typically at a reduced level compared to a full working paycheck. Importantly, unlike FEGLI, which is generally received income-tax free by beneficiaries, the survivor annuity and portions of the BEDB are taxable as ordinary income. That means the actual spendable amount can be lower than families expect once federal (and potentially state) taxes are factored in.

FEGLI may help with short-term needs, but it often isn’t designed to sustain a household for decades.

And while these benefits create a strong foundation, they don’t automatically adjust for a family’s specific financial reality — such as mortgage obligations, college funding, outstanding debt or the surviving spouse’s ability to return to work.

Without understanding how the pieces fit together, families can find themselves financially stable on paper yet still facing difficult trade-offs in real life.

Understanding inherited TSP rules — and why planning matters

Your Thrift Savings Plan is one of the most powerful wealth-building tools available to federal employees. But it is not self-executing — especially when it comes to what happens after death.

Multi-generational planning inside the TSP follows very specific rules:

Original TSP owner → First beneficiary → Second beneficiary

Each stage changes the distribution options and tax treatment — sometimes dramatically.

When the first beneficiary inherits

If the beneficiary is a spouse:
The spouse can move the TSP into a Beneficiary Participant Account within the TSP system. This preserves tax deferral and allows for continued structured withdrawals. With proper planning, this can maintain flexibility and long-term income control.

If the beneficiary is a non-spouse:
Under current post-SECURE Act rules, most non-spouse beneficiaries must follow the 10-year rule, meaning the account must be fully distributed by the end of the 10th year following death.
In limited cases (eligible designated beneficiaries or pre-SECURE inheritances), life expectancy “stretch” rules may still apply.

Already, you can see how outcomes vary depending on who inherits.

When the second beneficiary inherits

If the first beneficiary later passes and a second beneficiary inherits what is known as a non-designated beneficiary account, the rules become even more restrictive.

In most cases, the second beneficiary must fully distribute the account by Dec. 31 of the year of receipt.

There is no new 10-year clock and no life expectancy stretch available.

This often surprises families — and can trigger large, compressed taxable distributions.

Where real-world problems show up

On paper, the TSP is highly efficient. In real life, issues arise when it isn’t aligned with your actual family and financial situation.

Common gaps we see:

• Beneficiary forms that haven’t been updated in decades
• Asset allocations that no longer match your timeline
• Assumptions that a spouse will “figure it out” later
• No tax strategy for inherited withdrawals

The TSP does not automatically pass to your spouse. It only does if your beneficiary designation form says so. And even when it does pass correctly, the way distributions are structured can significantly impact:

• Income taxes
• Income-Related Monthly Adjustment Amount exposure
• Long-term income sustainability
• Multi-generational wealth transfer

A well-funded TSP without a clear plan can still create financial stress for survivors.

The goal isn’t just to accumulate a large balance. 
It’s to ensure that balance transitions efficiently, tax-smart and aligned with your family’s real-world needs.

Because when it comes to inherited retirement accounts, the rules — not the balance — often determine the outcome.

Disability: The risk no one likes to talk about

Most people insure their car, their home, even their phone. But few adequately insure their ability to earn a living. You may see this referred to as your human capital. Federal disability benefits exist, but they often:

• Replace only a portion of income
• Take time to approve
• Come with strict eligibility requirements

If an illness or injury prevents you from working for months, or even permanently, your family may face a sudden drop in income at the exact moment expenses rise.

This is one of the most financially disruptive events a family can experience, yet it’s one of the least planned for.

Health care and long-term care: The silent cost

FEHB is excellent health insurance. But it does not cover everything.

Long-term care refers to help with daily activities due to aging, illness or cognitive decline. It’s one of the largest financial risks retirees face. Medicare coverage is limited, and long-term care expenses can quietly drain savings and force difficult family decisions.

Without a plan, the burden often falls on a spouse or adult child, both from a financial and emotional perspective.

The real risk can be your assumptions

Most benefit shortfalls don’t happen because people don’t care. They happen because people assumed.

• Assumed FEGLI was enough
• Assumed beneficiaries were correct
• Assumed retirement would “work itself out”
• Assumed there would be time later

Life doesn’t always give us that time.

No better time than right now to act

You don’t need to be a financial expert to protect your family better. You just need clarity.

Start with these steps:

• Review your FEGLI coverage and ask what it replaces.
• Confirm all beneficiaries—TSP, FEGLI, pension, savings.
• Understand your Survivor Benefit Plan election and whether it aligns with your family’s needs.
• Consider income protection, not just retirement income.

Neil Cain is a certified financial planner with Capital Financial Planners. To discuss your investments, including your TSP, register for a complimentary Retirement Readiness Meeting.  For topics covered in even greater depth, see our YouTube Channel.