Low-Cost Term Life Insurance Alternative to Federal Employees Group Life Insurance Option B for Career Federal Employees
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Federal employees have access to great benefits, and the Federal Employees’ Group Life Insurance (FEGLI) program is no exception. Having said that, there are still times when alternatives, such as individual term life insurance, will prove to be the better choice. Unfortunately, many federal employees take the easy road and simply elect FEGLI coverage. As a result, they may pay far more for their life insurance coverage than necessary.
I want to point out there are several components to the Federal Employees Group Life Insurance plan. However, this article will focus exclusively on FEGLI Option B, which can be elected at one, two, three, four or five times annual pay as a death benefit. There’s no question that FEGLI Life Insurance has its advantages, but there are several drawbacks as well, which create times when enduring the inconvenience of obtaining an individual term policy will prove worthwhile. For starters, premiums for FEGLI Life Insurance are based on five-year age bands and will increase as the employee gets older. On the other hand, individual term insurance policies can have a premium guaranteed to remain level for as long as 30 years.
In some cases, the FEGLI Life Insurance may start out less expensive than a comparable individual term policy; but because the FEGLI Life Insurance increases over time, the total cost of FEGLI may be more over the long run. For example, a 45-year-old male federal employee with $250,000 of Option B coverage will pay $519 annually, but that will increase to $846 annually beginning at age 50, $1,496 annually at age 55 and $3,381 at age 60. Let’s assume the employee retires at age 65 and elects the full reduction option. Under this option, the Federal Employees Group Life Insurance coverage will be reduced 2 percent every month, beginning the second month after his 65th birthday (or if he retired after 65, the second month after his retirement date) until the coverage reduces to zero.
On the other hand, this same 45-year old federal employee could get a $250,000 individual term life insurance policy with a 25-year, guarantee-level premium payment for $943 per year. Note: This is for a standard health rating, not an elusive preferred rate for only those in the best of health. While the FEGLI Life Insurance will begin declining at age 65, the individual insurance policy will provide full coverage until the insured attains age 70 or simply stops paying the premiums after the 24th year, which will provide coverage for an additional six months longer than the FEGLI Life Insurance.
Add up all the premiums paid, and the FEGLI Life Insurance will cost a total of $31,200. Although the individual term insurance premium starts out higher and continues for an extra four years, the total cost is only $22,632 – a savings of more than $8,500.
Another drawback to the Federal Employees Group Life Insurance is that there’s no discount for being in good health. Individual term insurance policies, on the other hand, are medically underwritten and provide healthy individuals with lower premiums. For example, let’s assume the 45-year-old in the above example is in excellent health and qualifies for a preferred health rating. Instead of paying $943 per year, and the total savings compared to FEGLI Life Insurance jump to nearly $20,000 over the 24-year period.
Furthermore, women tend to live longer than men, and individual insurance policies will reflect this with lower premiums for women. FEGLI Life Insurance does not account for this actuarial difference and are the same for men and women. If our 45-year-old federal employee were female, she could get a 25-year individual term policy for $670 per year ($270 less than her male counterpart) as a standard health risk and only $388 per year as a preferred health risk. Assuming the same time period, the total savings would be $15,120 and $21,888 respectively.
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In some cases, an individual term insurance policy will be less expensive from day one. For example, let’s assume a 55-year-old male who will be retiring at age 65 and electing the full reduction option wants to compare the cost of carrying FEGLI Life Insurance with individual term insurance. To ensure he’ll have coverage for as long as FEGLI Life Insurance provides coverage, he’ll select a 15-year, guaranteed-level term insurance policy. Recall that the FEGLI Life Insurance Premium for a 55-year-old is $1,494. But this time, the individual term insurance premium for a standard health rating is only $1,320 per year. The FEGLI Life Insurance from age 55 to age 65 will total $24,375, whereas the total cost of the term insurance for 14 years (six months after the FEGLI coverage will be reduced to zero) will only be $18,480 – a savings of almost $6,000.
The annual premium for the 15-year individual insurance policy for a 55-year-old female is only $825 per year – a savings of almost $13,000 over the 14-year period. Once again, these premiums are for a standard health rating. If the federal employee is in good-to-excellent health, the savings could be much larger.
Some of the biggest savings can come when a federal employee continues to work after age 65 or when a retiree continues Option B coverage with no reduction beyond age 65. For example, assuming a standard health rating, a 65-year-old male can get a $250,000 insurance policy with premiums guaranteed to remain level for 10 years for $2,343 per year. Compared to the Federal Employees Group Life Insurance coverage running at $4,029 per year and this will rise to $7,410 per year at age 70. In this example, the individual term insurance will provide nearly $34,000 in savings over the 10-year period. And for a female? A 65-year-old female can get the 10-year policy for $1,463 per year, providing a total savings of approximately $43,000 over 10 years.
There’s no “one size fits all” answer here. As this article illustrates, it’s not simply an issue of what happens to be less expensive in the beginning. To determine whether FEGLI or a low-cost term life insurance policy will be the right option, do an analysis of your own timeline. I have created a tool at the top of this page that will help you identify the costs by age band discussed here.
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Check out our article on FEGLI Option B or a Universal Life Policy for the Career Federal Employee
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