FEGLI, an acronym for Federal Employees Group Life Insurance, is an employer-sponsored term life insurance program that is provided to all employees of the federal government. Employees are automatically enrolled in the Basic coverage in the program unless they opt out.
The Basic coverage consists of low-cost term life insurance with the government paying one-third of the premium and the employee paying the balance. Monthly premiums are deducted from the employees' paycheck each pay period.
Basic coverage is calculated by using the employee's basic salary, rounded up to the nearest $1,000, and then adding $2,000 to that amount. For example, if an employee's salary of $29,200, and then rounded to the nearest $1,000, the insurance coverage would amount to $32,000 after including the additional $2,000.
Included at no cost to employees under age 35, is additional life insurance equal to the Basic coverage. So, using the example in the previous paragraph, this employee would receive an additional $32,000 in life insurance coverage. This Extra benefit does decrease, however, by 10% each year once the employee reaches the age of 35-years old. This means that at age 45 the Extra benefit coverage would be exhausted.
Also included in the Basic coverage is Accidental Death and Dismemberment Insurance (also at no additional charge) which pays an additional amount equal to the Basic coverage if the employee dies as a result of an accident. The Dismemberment benefit will pay an amount equal to the Basic coverage if the employee loses two or more of the following: a hand, foot, or the sight in one eye. If the employee loses a hand, foot, or sight in one eye, the coverage will pay one-half of the Basic coverage.
FEGLI Option B
FEGLI Option B allows the employee to purchase additional insurance up to five times the amount of their basic salary rounded up to the nearest $1,000. Employees are 100% responsible for the premium for Option B coverage. Although Option B coverage provides additional insurance for the employee at a very competitive rate when it is originally elected, the rates go up every five years after the employee reaches age 35, and at age 55, the rates can become unaffordable.
Using the previous example provided, here is an example of how Option B insurance coverage will increase over time:
Notice at age 50 the insurance rate per pay period increases dramatically from $16.50 to $66 at age 60. That translates to $132 per month (bi-weekly pay period) and almost $300 per month at age 70.
FEGLI Option B and Retirement
When the employee reaches retirement age, he or she can elect either a full reduction in Option B coverage or no reduction. If the employee chooses the full reduction, the premiums for the insurance will cease but the coverage will be reduced by 2% each month for 50 months until it is completely exhausted. This means that an employee who retires at age 65 will have no Option B coverage at age 70.
If the employee decides not to go the reduction route but keep the full value of their Option B coverage, the monthly premiums would increase every five years at age 65. The problem with this option is although you will continue to have your Option B coverage, it will become unaffordable for most employees.
When we consider an employee at a higher pay grade like $200,000, the premium for Option B coverage of $1 Million would go into the thousands once the employee reaches age 55.
Compare FEGLI Option B rates for $1 Million Coverage with Level Term Insurance
Fortunately for federal employees who elected Option B coverage, there is an affordable alternative when they reach age 55. Since rates for Term Insurance are as low as they've ever been over the last five decades, purchasing the coverage you would have elected under Option B is substantially more affordable using Term insurance in the private marketplace. When you add to that the ability to purchase low-cost riders for your policy that will broaden your coverage and offer living benefits, Term insurance in the private marketplace is an extremely better alternative.
Here is the cost for $1 million insurance coverage using FEGLI Option beginning at age 55:
Notice how the Monthly rates increase from $236.81 per month to $948.21 in just ten years. And then when the insured reaches age 70, the rates go up to $2,069.60. That is an incredible amount of money coming out of the insured’s budget.
Now, let’s take a look at what is offered in the private insurance marketplace:
Here are our Term Insurance rates for a 55-year-old male non-smoker:
Obviously, the comparison between these two options is remarkable. You can elect the FEGLI Option B coverage and pay $172,205.96 for $1 million in coverage from age 55 to age 80, or you can purchase your $1 million in coverage in the private insurance marketplace and pay only $39,504 for your coverage from age 55 to age 80. The savings would amount to a whopping $132,701.96.