Why Federal Workers Are Weighing FEGLI’s Rising Costs Against Other Life Insurance Options

Key Takeaways:

1. The Federal Employees’ Group Life Insurance (FEGLI) program offers comprehensive coverage but has seen rising premiums, particularly for older enrollees.

2. Exploring alternative life insurance options could save you money while meeting your coverage needs, but it’s important to weigh the pros and cons carefully.

Understanding FEGLI: What It Offers

FEGLI is the life insurance program designed specifically for federal employees. It’s one of the largest group life insurance programs in the country, offering a combination of basic and optional coverage to employees and retirees. FEGLI provides:

• Basic Insurance:

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  This includes coverage equal to your annual basic salary (rounded up to the next $1,000) plus $2,000. The government pays one-third of the premium while you pay the rest.

• Optional Coverage: Three tiers of additional insurance are available: Option A (an extra $10,000), Option B (1-5 times your salary), and Option C (family coverage for eligible dependents).

While FEGLI is convenient and automatic for many employees, its cost structure—especially for optional coverage—may not be ideal as you age.

Rising Costs: Why FEGLI Premiums Increase

FEGLI’s premiums are determined by age brackets, meaning the cost increases significantly as you get older. For instance:

• Premiums for basic coverage remain relatively stable and are partially subsidized.

• Optional coverage costs rise steeply, particularly for employees over 50.

• Retirees who retain FEGLI may see some of the highest premium increases as the government no longer subsidizes their coverage.

By the time you reach retirement age, you may find yourself paying much more for the same level of coverage compared to when you started. For this reason, many federal employees reevaluate their life insurance needs before or shortly after retiring.

Evaluating Your Life Insurance Needs

The first step to deciding whether to stick with FEGLI or explore alternatives is understanding how much life insurance you need. Ask yourself:

• Who depends on my income? Consider your spouse, children, or other dependents.

• What financial obligations do I have? Include mortgage payments, debt, college tuition, and any future expenses.

• How long will I need coverage? You may only need temporary coverage until your children are independent or your mortgage is paid off.

Once you’ve determined your needs, compare them with the coverage and costs provided by FEGLI and other life insurance options.

Alternatives to FEGLI: Exploring Your Options

There are several life insurance options available that may better suit your needs or budget. These include:

1. Term Life Insurance

Term life insurance offers coverage for a specific period, such as 10, 20, or 30 years. It tends to have lower premiums than FEGLI’s optional coverage and is ideal for temporary needs like paying off a mortgage or funding your child’s education.

Benefits:

• Lower cost compared to FEGLI’s age-based premiums.

• Flexibility in choosing your coverage amount and duration.

Drawbacks:

• No cash value or lifelong coverage.

• Premiums may rise if you renew after the term ends.

2. Whole Life Insurance

Whole life insurance provides lifelong coverage and includes a savings component that builds cash value over time. It’s generally more expensive than term life insurance but may appeal to those seeking permanent coverage.

Benefits:

• Guaranteed lifetime protection.

• Cash value growth that you can borrow against.

Drawbacks:

• Significantly higher premiums compared to term policies.

• May not be necessary for those with only temporary needs.

3. Universal Life Insurance

Universal life insurance combines lifelong coverage with flexible premiums and death benefits. It also includes a cash value component, similar to whole life insurance, but with more customization options.

Benefits:

• Flexible premiums and coverage.

• Potential for cash value growth tied to interest rates.

Drawbacks:

• Can be complex to manage.

• Investment returns may not meet expectations.

Making the Switch: Things to Consider

If you’re thinking about replacing FEGLI with a private life insurance policy, keep these factors in mind:

Timing Matters

It’s best to purchase new life insurance while you’re still relatively young and healthy, as premiums are lower. Waiting until your 50s or 60s could result in significantly higher costs or even disqualification due to medical conditions.

Compare Costs and Benefits

Obtain quotes from multiple insurers and compare them with FEGLI’s premiums. Look at both the monthly cost and the total coverage amount to ensure you’re getting the best value.

Don’t Cancel FEGLI Too Soon

Before canceling FEGLI, confirm that your new policy is active and meets your needs. Avoid any gaps in coverage, especially if you have dependents relying on your income.

Portability and Flexibility

FEGLI coverage ends if you leave federal service (unless you’re retiring), while private policies are portable and stay with you regardless of employment.

Balancing Coverage and Retirement Planning

For federal employees nearing retirement, life insurance is just one piece of the puzzle. Consider how it fits into your overall financial and estate plan:

• Coordinate with Retirement Income: Your FERS or CSRS pension, Social Security, and Thrift Savings Plan (TSP) distributions may reduce the need for large life insurance policies.

• Plan for Final Expenses: Even a small policy can help cover funeral costs and other end-of-life expenses.

• Think About Your Legacy: If leaving an inheritance is important, ensure your life insurance aligns with your estate planning goals.

Additional Tips for Federal Employees

Take Advantage of Open Season

Each year during Open Season, you can make changes to your FEGLI coverage. Use this time to review your options and decide if they still meet your needs.

Understand FEGLI’s Reduction Options

Retirees can choose to reduce their FEGLI coverage after age 65 to lower premiums. However, this comes with a corresponding decrease in the payout amount.

Use Online Calculators

Many insurers and financial planning websites offer tools to help you estimate your life insurance needs and compare costs. These can be invaluable when deciding between FEGLI and private options.

Consult a Financial Advisor

A financial advisor with experience in federal benefits can help you evaluate your options and create a plan tailored to your goals.

Why Some Federal Workers Choose Private Insurance

Federal employees often turn to private life insurance for:

• Cost Savings: Private policies can be more affordable than FEGLI’s optional coverage for older employees.

• Customizable Terms: Choose the exact coverage amount and duration to match your needs.

• Additional Features: Many private policies include riders for disability, long-term care, or other benefits.

While FEGLI remains a valuable benefit for many, it’s not always the most cost-effective option, particularly for those nearing retirement.

Weighing Your Options Wisely

The decision to stick with FEGLI or switch to private life insurance is deeply personal and depends on your financial situation, health, and family needs. Take the time to research your options, and don’t hesitate to seek professional advice if needed.

Plan Your Financial Future with Confidence

Navigating life insurance decisions as a federal employee can feel overwhelming, but understanding your options puts you in control. Whether you stick with FEGLI or explore alternatives, the right choice is the one that aligns with your needs and goals. Start planning today to ensure peace of mind for you and your loved ones.