Key Takeaways:
- If you’re keeping FEGLI into retirement, understanding how the cost structure shifts as you age is critical—it might be costing you more than it’s worth.
- There are alternatives to consider that could save you money while still providing the life insurance coverage you need.
Life insurance is one of those things we don’t think much about until it becomes relevant, especially in retirement. For federal employees
- Also Read: New TSP Withdrawal Rules and What They Mean for Your Federal Retirement Plans
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- Also Read: Early Retirement Myths Federal Employees Need to Stop Believing
The FEGLI Structure: What Changes After Retirement?
When you’re an active federal employee, FEGLI premiums come out of your paycheck, and you likely don’t even notice it. But once you retire, that premium structure shifts—and for many retirees, it can come as a surprise. FEGLI is broken into different parts: Basic, Option A, Option B, and Option C, with the costs tied to your age. While the Basic coverage is partially subsidized by the government, it’s the optional coverage, particularly Option B, that tends to skyrocket in cost as you get older.
The Basic Option: What You Pay
FEGLI Basic coverage offers a payout equal to your salary rounded up to the next $1,000, plus $2,000. Once you retire, you’ll have the option to keep this coverage, and you can choose to reduce it or maintain it at its full amount. But here’s the kicker—if you don’t reduce your coverage, you’ll be paying for it indefinitely. In 2024, FEGLI Basic for retirees still offers a 75% reduction option, which means that at age 65, your coverage decreases by 2% each month until it hits 25% of its original value. This can be a budget-friendly option since it eliminates your premiums at age 65.
On the other hand, if you choose to keep your full Basic coverage after retirement without any reductions, you’ll continue paying premiums for life. And while that might seem like a good deal initially, those premiums, while manageable during your working years, can add up quickly once you’re on a fixed income.
The Optional Coverage: A Pricey Proposition
Here’s where things get tricky: Options A, B, and C. Let’s focus on Option B, which is the one most federal retirees hold onto for additional life insurance. Option B allows you to choose coverage between one to five times your annual salary. The trouble is, as you age, the premiums increase dramatically—especially once you hit 65.
For example, by the time you’re in your late 60s and early 70s, Option B premiums can more than double. This is where many retirees start asking, “Is it worth it?” After decades of paying into the plan, the escalating cost of coverage might simply not make financial sense anymore, especially when there are alternatives on the market.
Should You Keep FEGLI in Retirement?
Let’s get down to the heart of it: Is it worth keeping FEGLI in retirement? The answer depends largely on your financial situation and your specific needs for life insurance.
If you don’t need much coverage and are comfortable with reduced benefits, the 75% reduction on Basic might make sense for you. This allows you to still maintain a level of coverage while eliminating ongoing premium costs once you reach 65.
But if you’re someone who needs more robust coverage—or if you’re relying on Option B for a substantial life insurance payout—you might want to reconsider. By the time you’re in your 70s, the premiums for Option B can become unreasonably high, draining your retirement income. While keeping coverage for peace of mind is understandable, there are often more cost-effective options available that provide similar benefits without such steep premiums.
Alternatives to FEGLI: Time to Shop Around?
By 2024, the insurance market has expanded significantly, offering federal retirees more choices than ever before. This means you’re not stuck with FEGLI if it doesn’t work for you anymore. Depending on your age and health, you might find comparable policies through private insurance providers with premiums that are more manageable in retirement.
If you’re in good health, it might be worth looking into level-term life insurance, where your premiums stay fixed for a set period, or even a whole-life policy that can provide guaranteed coverage as long as you continue to pay your premiums. These alternatives might offer you more value, especially if you plan on maintaining life insurance well into your retirement years.
Another option to consider is whether you even need life insurance at all. If your financial obligations are covered, and your spouse or dependents won’t rely on your income, cutting back or eliminating life insurance altogether could be a smart financial move. After all, the point of life insurance is to protect against the unexpected. If you’ve built up sufficient savings or investments, life insurance might be an unnecessary expense.
How the Numbers Add Up
Looking at the big picture, it’s essential to weigh the cost of maintaining your FEGLI coverage against what you’re getting in return. For many retirees, especially those keeping Option B, the cost starts to outweigh the benefit around age 65-70. At that point, you might be paying hundreds of dollars a month for coverage that might not even be necessary.
On the other hand, keeping Basic coverage with the 75% reduction might still offer enough peace of mind at a lower cost. You won’t pay any premiums after age 65, and although the payout is reduced, it might be enough for final expenses or to leave a small legacy.
It’s all about doing the math. Take a hard look at what you’re paying, what you’re getting, and whether it fits into your overall retirement plan. Sometimes, that sentimental attachment to a plan you’ve been paying into for years can cloud judgment. But when the numbers start working against you, it’s time to reevaluate.
The Bottom Line: Does FEGLI Still Make Sense for You?
The question of whether FEGLI is still worth it after you retire doesn’t have a one-size-fits-all answer. For some, especially those who only need a small amount of coverage, FEGLI can still be a valuable part of their retirement plan. But for others—especially those relying on the optional coverage—the cost might simply outweigh the benefit.
As 2024 unfolds, it’s more important than ever to be savvy about your retirement finances. Look at your current needs, project your future expenses, and don’t be afraid to explore alternatives. Life insurance should serve you, not the other way around.
What You Should Focus On Next
Instead of letting FEGLI take a big bite out of your retirement, consider reassessing your life insurance needs. Whether you keep FEGLI or move on to another option, staying proactive about your coverage will help ensure that your retirement years are as financially secure as possible.
