Thinking About Dropping FEGLI in Retirement? Here’s Why You Might Want to Think Twice

Zoe Young
November 12, 2024

Key Takeaways

Dropping your Federal Employees’ Group Life Insurance (FEGLI) in retirement could lead to unexpected financial gaps in your long-term plan, so it’s worth carefully weighing your options.
Understanding the costs, benefits, and alternatives to FEGLI can make a big difference in managing financial security for you and your loved ones in retirement.

Weighing the Pros and Cons of Keeping FEGLI in Retirement

If you’re approaching retirement and weighing your options for life insurance, you might be considering dropping your Federal Employees’ Group Life Insurance (FEGLI). Many retirees start questioning the costs and benefits of FEGLI as they leave the workforce, especially as premiums increase with age. However, dropping FEGLI might not be as simple a decision as it first appears. Let’s dive into why FEGLI can be beneficial in retirement, some potential drawbacks, and how to evaluate whether you should keep it.

Understanding the Purpose of FEGLI in Retirement

FEGLI offers federal employees a term life insurance plan with basic coverage that you may have relied on during your working years. However, FEGLI costs rise as you age, and the benefits structure changes once you retire. Despite the higher premiums, FEGLI has some unique attributes that make it worth a second look for retirees, especially those considering long-term financial security for their families.

How FEGLI Changes in Retirement

Upon retirement, your FEGLI coverage typically reduces over time unless you choose to continue with full coverage. Here’s a quick look at how it works:

Option A (Standard Coverage): Provides $10,000 in coverage, which doesn’t change in retirement.
Option B (Additional Coverage): Allows multiples of your salary in coverage. However, this begins reducing by a set percentage each year after age 65 unless you pay higher premiums.
Option C (Family Coverage): Covers family members at set multiples of $5,000 for a spouse and $2,500 for each eligible child. Like Option B, it also reduces over time after age 65 without a premium increase.

These changes mean your life insurance benefit may shrink just when you might need it the most, potentially leaving your loved ones with less than you had planned.

The Financial Trade-Off: Cost of Premiums vs. Value of Benefits

Rising Premiums Over Time

One major drawback to keeping FEGLI into retirement is the cost. As you age, the premiums rise significantly, especially for the additional coverage options like Option B. These increased premiums can become a substantial financial burden, especially if you’re managing your budget carefully on a fixed retirement income. For instance, once you reach a certain age, your premiums for additional coverage can reach levels where it may feel like you’re paying more than the benefits are worth.

Understanding the Value of FEGLI Benefits

On the other hand, FEGLI offers guaranteed life insurance without requiring additional medical exams, an appealing aspect for retirees who may not qualify for affordable private life insurance due to health concerns. The coverage FEGLI provides could be crucial for those with ongoing financial obligations or dependents. If you have loved ones relying on you, the security of a guaranteed payout is valuable.

Alternatives to FEGLI: Should You Look Elsewhere?

Deciding to drop FEGLI doesn’t mean you have to go without life insurance. Here are some alternative strategies worth considering:

Term Life Insurance

Term life policies offer coverage for a specific period (e.g., 10, 20, or 30 years), typically at a lower cost than permanent life insurance. You pay a set premium for the length of the term, and once it ends, the coverage stops unless you renew. However, finding affordable term life insurance might be difficult if you’re older or in poor health.

Whole Life Insurance

Whole life insurance is permanent, meaning it doesn’t expire as long as you keep up with the premiums. Unlike FEGLI’s term coverage, whole life policies often come with higher premiums but build cash value over time, which can offer additional financial benefits. This can be a good option for retirees looking for lifelong coverage, though it’s important to weigh the costs carefully.

No-Medical Exam Life Insurance

If medical issues are a concern, no-medical-exam policies might offer an option for coverage without the need for extensive health evaluations. These can be more costly than traditional life insurance options, but they do offer a way for retirees to secure coverage despite health issues. However, be aware that the coverage limits are usually lower.

Key Questions to Ask Before Dropping FEGLI

1. How Much Coverage Do I Need?

Determining how much life insurance coverage you need is essential. Think about any debts, financial support for a spouse or other dependents, and any end-of-life expenses. Your needs will vary depending on whether you have a mortgage, ongoing medical expenses, or loved ones who rely on you financially.

2. Will My Retirement Income Cover Premiums?

One of the most important questions is whether you can afford FEGLI premiums on a retirement budget. If the rising costs are likely to strain your finances, you might want to explore more affordable options. Remember that a well-balanced retirement plan covers not only daily expenses but also unexpected costs down the road.

3. Do I Have Dependents Who Rely on Me Financially?

If you have dependents who rely on you for financial support, it’s essential to consider what would happen to them financially if you passed away. FEGLI can provide a critical safety net, helping cover living expenses and debts. However, if your children or spouse are financially independent, you may need less coverage than you did in your working years.

4. What Are My Other Options for Final Expense Coverage?

Beyond FEGLI, final expense insurance or “burial insurance” might be worth considering if you’re only looking to cover end-of-life costs. These policies generally have lower premiums and offer modest coverage amounts, specifically for funeral and burial costs.

Why Dropping FEGLI Could Be a Risky Move

While dropping FEGLI might seem like a good way to cut expenses, it’s important to remember that life insurance is often more expensive to obtain as we get older. Once you let FEGLI go, you might find it challenging to secure comparable coverage at a similar price or without medical examinations. Having a gap in coverage can be a major setback, especially if unexpected financial needs arise.

If your health changes, it might be impossible to get private life insurance at a reasonable rate, leaving you without coverage when you might need it most. Retaining FEGLI can give you some peace of mind, knowing that you won’t have to worry about finding new coverage later in life.

Choosing What’s Best for You and Your Family

When it comes down to it, the decision to drop FEGLI in retirement is deeply personal and depends on your financial circumstances, health, and family needs. Remember that keeping a portion of your FEGLI coverage can be an option—you don’t necessarily have to keep the entire policy. Balancing costs with benefits can help ensure you’re making the most informed choice for your financial security in retirement. Taking a long-term view and consulting with a financial planner can make a big difference in choosing the path that’s best for you and your family.

Thinking Ahead for Your Retirement Security

In the end, whether you keep or drop your FEGLI coverage depends on your unique financial situation, health, and priorities for your family. It’s not an easy decision, but understanding the options, costs, and benefits will help you make an informed choice that aligns with your retirement goals. FEGLI isn’t the only option, but it might still play a critical role in your financial plan, especially if your other options are limited or costly.