Key Takeaways:
- Federal employees nearing retirement must understand how changes in FEGLI (Federal Employees’ Group Life Insurance) could impact their financial planning.
- Adjusting or reviewing FEGLI coverage can help avoid rising costs and secure the best benefits for retirement.
FEGLI Life Insurance: The Changes Federal Employees Should Know About Before They Head Toward Retirement
- Also Read: What You Need to Know About New TSP Withdrawal Flexibility for Federal Retirees
- Also Read: FEDVIP in 2024—What Federal Employees Should Know Before Open Season
- Also Read: How Federal Employees Are Using TSP Plans to Create More Secure Retirements
Why FEGLI Matters for Retiring Federal Employees
FEGLI provides life insurance coverage specifically designed for federal employees, offering a basic plan and additional options to customize coverage. Throughout your career, the cost of FEGLI is manageable because the government subsidizes a portion of your premiums. However, as you approach retirement, you may notice that your premiums and coverage options shift, leading to higher costs and potentially less coverage than expected.
Federal employees need to understand these changes, especially if they plan to rely on FEGLI as a primary part of their retirement plan. By anticipating and managing the adjustments, you can make the necessary tweaks to your insurance strategy and ensure you aren’t caught off guard by unexpected costs.
Premiums and Age: The Cost of FEGLI in Retirement
One of the most significant aspects to consider when approaching retirement is the increase in FEGLI premiums as you age. During your working years, your premiums are relatively low, but they rise significantly as you get older—particularly for the optional coverage (Option B). This increase reflects the higher risk associated with aging, and it’s a critical factor federal employees must plan for if they intend to keep their FEGLI coverage post-retirement.
Many retirees are surprised by the dramatic rise in premiums, particularly after the age of 65. It’s not uncommon for these premiums to double or triple, putting a strain on your retirement budget. As a result, some federal employees choose to reduce or cancel parts of their coverage to manage costs effectively. If you plan to maintain your FEGLI coverage, understanding this premium structure is essential to avoid budget shortfalls in retirement.
Adjusting Coverage: The Options You Have
Federal employees approaching retirement have several options when it comes to adjusting their FEGLI coverage. While the basic FEGLI coverage remains relatively affordable, the optional components (Options A, B, and C) can become prohibitively expensive. Let’s break down these options:
- Basic FEGLI Coverage: This coverage provides a death benefit equal to your salary, rounded up to the nearest thousand, plus $2,000. The good news is that basic FEGLI coverage becomes more affordable post-retirement, as the cost either reduces significantly or, in some cases, may be fully covered by the government.
- Option A: This adds an extra $10,000 in coverage, but premiums can increase with age. Many retirees find it manageable to keep this option, given the moderate additional coverage it offers.
- Option B: This is where costs can escalate quickly. Option B provides up to five times your annual salary in coverage, but the premiums rise substantially as you age. Many federal employees reduce or drop this option to save on premiums.
- Option C: This option covers eligible family members. Retirees may find this option beneficial if they want to ensure coverage for their spouses or dependent children. However, as with Option B, the costs can become burdensome with age.
Considerations for Retaining or Dropping FEGLI Coverage
When deciding whether to retain or drop FEGLI coverage, there are a few key considerations:
-
Retirement Income: Calculate your retirement income and ensure that you can afford the increased premiums without compromising your quality of life. If the costs of maintaining FEGLI coverage are too high, it may be wise to adjust your plan or explore alternative options.
-
Health Status: Evaluate your health status and any potential risks. If you are in good health, you may find that private life insurance options offer better rates, especially if you lock in a policy while you’re still younger. However, for those with existing health concerns, retaining FEGLI may be more practical despite the cost increases.
-
Long-Term Plans: Consider your long-term needs and the legacy you want to leave behind. For some, maintaining basic FEGLI coverage combined with other retirement savings or investments may be sufficient. Others may want to keep more substantial coverage to ensure their loved ones are financially secure after they pass.
Alternatives to FEGLI: Exploring Private Insurance
While FEGLI provides a convenient option for federal employees, especially early in their careers, it may not always be the best choice for those approaching retirement. The increase in premiums can make it less cost-effective, prompting some to explore private life insurance plans as an alternative. Private plans may offer the ability to lock in lower premiums earlier, making them an appealing option for those in good health who plan ahead.
It’s essential to compare the coverage options and costs of private insurance versus FEGLI, keeping in mind your specific financial needs and health status. For some, transitioning to a private plan or a hybrid option that combines term and whole life insurance may offer more stability and flexibility in retirement.
Managing FEGLI After Retirement: Reduction Choices
One aspect of FEGLI that federal employees must consider before retirement is the automatic reduction choices available for basic coverage. When you retire, you can select how much your FEGLI basic coverage will reduce over time, with options ranging from 25% reduction to no reduction at all. Each option has different cost implications:
- 75% Reduction: This option significantly lowers your premiums but also reduces your benefit. It’s a cost-effective choice for those who want to minimize expenses in retirement.
- 50% Reduction: This provides a middle-ground approach, balancing cost and benefit levels.
- No Reduction: Retaining full coverage comes at a higher premium, but it may be suitable for those who prioritize leaving behind a significant benefit.
The Importance of a Thorough Review Before Retirement
Given the complexities surrounding FEGLI and its costs, it’s crucial for federal employees to conduct a thorough review of their insurance needs and coverage options before retirement. This review should include:
- A detailed examination of current and projected FEGLI costs based on your age.
- An assessment of your health and potential eligibility for alternative insurance options.
- A comparison of other financial resources available, such as Thrift Savings Plan (TSP) balances, annuities, and retirement income sources.
This proactive approach ensures that your life insurance coverage aligns with your financial goals and budget, avoiding any unpleasant surprises as you transition into retirement.
Getting the Best Out of FEGLI as a Retiree
Federal employees can maximize the benefits of FEGLI by understanding the options and making timely adjustments based on their financial situation and retirement plans. Taking the time to evaluate all coverage options, explore private alternatives, and choose the most suitable reduction choices can help you maintain an affordable life insurance plan tailored to your needs.
By taking a strategic approach to FEGLI, you can enhance your retirement security and provide peace of mind for you and your loved ones.
