Hint: It doesn’t require an open season to cancel the optional coverage…
The Federal Employees Group Life Insurance program, typically referred to as FEGLI, is an employer-sponsored life insurance plan that is provided through MetLife.
Federal employees are automatically enrolled in FEGLI when they start working for the Federal Government unless they elect to opt-out of the program.
In most cases, especially for younger new federal employees, the FEGLI program is a bargain life insurance plan because the federal government pays a third of the premium for your Basic benefits.
Although the Basic plan provides a decent death benefit for employees, it will likely be insufficient for employees that have families to provide for if they should die unexpectedly.
Basic Coverage under FEGLI
As we mentioned earlier, purchasing FEGLI Basic coverage shouldn’t involve much thought because the federal government is going to pick up a third of the cost of the Basic coverage. The Basic coverage is equal to your annual pay, rounded up to the next $1,000, plus $2,000.
You then receive additional coverage or “Extra Benefit” which is two times the base amount if you are 35-years-old or younger. When you reach age 36, the “Extra Benefit” will be decreased by 10% each year until age 45 at which time the “Extra Benefit” reaches zero.
For example, if you begin working for the federal government at age 32 and are paid $51,500 annually, your Basic coverage would be $54,000 plus an Extra benefit of $54,000, totaling $108,000.
At age 36, your Extra benefit would begin to decrease 10% each year until you reach age 45 when it would be zero, leaving you with $54,000 in coverage.
The good news is that this life insurance coverage only costs the employee $16.20 per month because the employer (federal government) paid one-third of the monthly premium.
The Basic coverage will also include Accidental Death and Dismemberment coverage which pays an additional benefit if the employee dies as a result of an accident or is dismembered by losing a hand, a foot, or an eye.
Federal Employees have Additional Options with FEGLI
Understanding that many employees will need additional life insurance coverage, FEGLI provides a choice for employees to purchase additional life insurance. This certainly makes good sense for those employees that have families that will be financially impacted by the lost income of a primary breadwinner. Here is where FEGLI Option B comes in.
Option B coverage from FEGLI
Federal employees who want additional life insurance coverage can elect FEGLI Option B but will be responsible for 100% of the additional premium for this coverage. As long as you are covered by FEGLI Basic insurance you have the opportunity to purchase up to five times your annual rate of pay in additional coverage.
This is especially important for employees with families. The bi-weekly premium for the Option B coverage depends on the employee's age and the amount of insurance company they choose to purchase.
After purchasing Option B coverage, your premiums will increase each time you reach a new age group (typically every five years) until you retire.
When you retire, you have the choice of either electing full reduction in your multiples under Option B or no reduction in coverage. If you elect the full reduction choice, your Option B premiums will cease but your Option B coverage will be reduced 2% each month for a total of 50 months when the coverage amount equals zero.
If, however, your decision is to keep the full amount of life insurance under Option B, your monthly premium will be based on your actual retirement age and they will also be adjusted higher since you are no longer an employee of the federal government.
The bottom line is once you reach age 50, your premiums for Option B coverage will begin to increase exponentially until they become unaffordable, especially when you compare them to life insurance coverage that can be purchased in the private market. Knowing this, your most important decision is not what to do at retirement, rather what to do at age 50.
Drop Option B and Buy Level Term in the Private Market
As independent insurance professionals, we are keenly aware of the cost of life insurance in the private market versus the cost of insurance purchased under the FEGLI program. We understand as you will at age 50, that the insurance premiums under Option B will be increasing every five years at a rate that is incredibly expensive. And because of this, many employees and retirees under FEGLI should consider an exit plan out of Option B at age 50 if they are still healthy.
Our Top 3 Reasons to Drop FEGLI Option B and Buy Level Term
It's important to note upfront if you elect to drop Option B and get level term insurance from a private insurer, there are no FEGLI Open Season rules to worry about but only a simple form to file with the Office of Personnel Management. It's a very simple process and we encourage you to consider it for the following reasons.
- FEGLI Option B Rate Increases – As we mentioned earlier, your Option B rates increase every five years as you age into a new age group. At age 50, the rate increases are so substantial that most employees either cancel their coverage or replace it with life insurance purchased in the private market.
- Limited Coverage Available – FEGLII Option B coverage is usually not enough life insurance coverage for a family to be properly protected because of the limited death benefit that is available (only 5 times your annual pay).
- Option B Coverage is not Portable – When an employee chooses to leave the federal government for a job in the private market, the FEGLI coverage is not portable. Although you can convert your FEGLI coverage to whole life or universal life insurance, the premiums will be substantially higher and the federal government will no longer be paying a share.
Although the FEGLI program is a great deal for employees since your employer is picking up a third of the cost for the Basic coverage, your Option B coverage will end up being cost prohibitive as you get older. With level term insurance from the private market, you can depend on level premiums and purchase as much insurance as you need. And, as we’ve mentioned before, you don’t need to worry about waiting for the FEGLI Open Season to take action and replace your Option B coverage with affordable level term life insurance.