Last Updated on February 22, 2019 by lifepolicyshopper
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Check out the special spreadsheet that assists you to calculate the total FEGLI cost over your career along with the article Low-Cost Term Life Alternative to FEGLI Option B.
Top 10 Reasons to Replace Federal Group Life Insurance (FEGLI)
Here are the top 10 reasons you should consider replacing your federal employee group life insurance with a personally owned low-cost term or universal life insurance policy.
Check out the special spreadsheet that assists you to calculate the total FEGLI cost over your career along with the article Low-Cost Term Life Alternative to FEGLI Option B.
1. Premiums get prohibitively expensive as you get older. Especially once you reach the age of 50.
There’s nothing that jumps out at career federal workers when they see the cost of Federal Insurance Life Insurance (FEGLI) on their pay stub. Yes, it’s a lot of money but, it must be the right thing to do. The unfortunate part is that FEGLI coverage decreases while the cost of the life insurance increases in an amount of over 2,000 percent or as much as 20 times as progress through your federal career. Interestingly, when you get a step increase or a higher locality-base pay, FEGLI takes a bigger portion too. So it’s life insurance that gets more expensive as you get promoted. WHY? It’s a one size fits all group life insurance plan and it’s priced by one standard. Everyone pays the same rate regardless of their health, height, and weight. All employees are treated as if they all have the same health condition and the plan administrator uses the law of large numbers to charge the employees to use the plan.
Here is an example. A 50-year-old male, very overweight, smoker, developed cancer 2 years ago, has 2 driving under the influence charges, and is beginning to show signs of diabetes mellitus pays the same rate as a 50-year-old female, in very good health, works out every day and is a non-smoker.
If you have Federal Group Life Insurance – especially if you are using FEGLI with the optional B coverage, we can save you money regardless of your health. These savings will equal thousands of dollars over the span of your lifetime.
2. Coverage decreases at retirement.
To keep your Basic Federal Group Life Insurance coverage in retirement, you must have been insured with your basic coverage for at least five consecutive years while working. You will be given three choices on how you wish to carry your basic coverage into retirement:
The 75% reduction option. If you choose this option, a reduction begins the second month after your 65th birthday, or the second month after you retire, whichever is later. At that time your original coverage amount will begin to decrease by 2% each month until it reaches 25% of the original amount. It will remain level at that value for the rest of your life. Prior to the coverage starting to reduce, it will cost you 32.5 cents per thousand. After the death benefit begins reducing, your basic coverage is free and you will never pay another premium for it.
Here is an example: You retire at age 60, your basic coverage is a $100,000 death benefit and you choose the 75% reduction option. After you turn 65, the death benefit begins reducing by 2% a month until it reaches $25,000. It will remain at that $25,000 value for the rest of your life. Prior to age 65, this benefit cost you $32.00 per month. After the age of 65 when it began reducing until you no longer have to make payments. Once the death benefit reaches the full reduction you have a permanent death benefit to take care of your final expenses.
This is a compelling reason to keep the basic Federal Group Life Insurance coverage into retirement and is a unique value you as a Federal Employee will probably not find elsewhere.
3. Federal Group Life Insurance Builds no cash value.
Consider all of this money that you are paying into the FEGLI plan. At the end of your career, it’s gone. If you put the same dollar into a privately owned universal life policy, you would own the accumulated cash value for your use during retirement. The FEGLI coverage is term life insurance and does not build "cash value". The FEGLI group policy that you have is not only term life insurance, it is also increasing term life insurance, your premiums will increase while the coverage decreases.
Meet Mr. Green. He’s a 45-year-old postal employee. His salary is $45,000. He selected to use the optional A coverage and optional B coverage that pays a death benefit of 5 times his salary to his beneficiaries upon his death. When he retires he will pay premiums in the range of $66.26 until the age of 65, his FEGLI coverage will decrease from $489.000 down to $23,500 with no cash value. Imagine, if Mr. Green would have put the same dollars into his privately owned universal life policy, he would have access to an accumulated cash value during retirement. This is a difference of thousands of dollars.
4. Federal Group Life Insurance is not permanent life Insurance.
Your FEGLI life insurance coverage is not permanent coverage. Once you reach the age of 50, we’re of the opinion that you are paying for a decreasing term life insurance program at permanent insurance prices. Sure, Suze Orman and Dave Ramsey bash on permanent life insurance and universal life insurance has a bad rap. But when you consider re-directing the SAME money you’re putting toward the FEGLI life insurance program into a plan that you own and you have tax-advantaged access to later, this difference is compelling. Check out our article on using a universal life policy alternative to FEGLI.
Universal life insurance works in a similar way to a high-interest long-notice deposit account. When an insurance premium payment is sent to the life company the company deposit the funds into an interest account after deducting a nominal expenses charge per deposit. The funds then gain interest, with interest accrued being credited to the account on a monthly basis. Each premium payment made of course increases the fund, while compound interest is earned on the account month upon month. The cost of maintaining the insurance product or products purchased through the universal insurance scheme are also deducted from the universal account on a monthly basis.
Should the insurance policyholder wish to withdraw funds from their universal life policy then they can do so from the cash surrender value of the life policy. Withdrawals are normally controlled/limited to a set number per year. Depending upon the policy provider there may also be caps on the amount of money that the universal life policyholder can withdraw and a stipulation on a minimum amount of funds that should remain in the universal life account.
It should go without saying that withdrawals from a universal life insurance policy will reduce the overall amount of funds available when a lump sum claim is made upon death or terminal illness diagnosis. It is therefore important to manage the universal life account to ensure that there is sufficient coverage for your family and dependants in the event of your death. If you don't have the time to carefully manage a universal life product then you may end up with little to show for your life insurance premiums if and when a lump sum payout is triggered.
5. Life insurance for your spouse decreases to zero.
Recalling from a previous article, "What is FEGLI," Option C provides coverage for your spouse and eligible dependent children. When you elect Option C, all of your eligible family members are automatically covered. You may elect either 1, 2, 3, 4 or 5 multiples of coverage. Each multiple is equal to $5,000 for your spouse and $2,500 for each eligible dependent child.
For example, if you elect 3 multiples and then your spouse dies, you would receive $15,000 (3 times $5,000). If one of your eligible dependent children die, you would receive $7,500 (3 times $2,500).
The number of multiples you elect applies to all of your eligible family members. You cannot elect a number of multiples for your spouse that is different from the number of multiples for your eligible dependent children. Your Option C Full Reduction multiples are free after you reach age 65 or retire (if later), but reductions start. These Full Reduction multiples will reduce by 2% of the pre-retirement amount per month for 50 months, at which time that coverage will end.
6. The Federal Government does not Insure you.
There are provisions built in but when employment stops – so does your Federal Group Life Insurance coverage. Generally, Basic and Optional insurance of an insured employee who is in LWOP status stops on the date the employee completes 12 months in LWOP status. Your life insurance coverage terminates at the end of this 12-month period, with a 31-day extension of coverage and right to convert to an individual policy. If an employing agency determines that an employee’s regular pay for a pay period, after all other deductions, will not be enough to cover the employee’s share of the premium for all of the employee’s FEGLI Options, the employing agency must notify the employee. The employing office must provide the employee with a choice to either terminate some or all FEGLI coverage or to make premium payments directly.
It’s interesting to note here that if you are put in a leave without pay status while on military duty, you can keep your Federal Employees' Group Life Insurance coverage for up to 12 months. This coverage is free. Being called up to active duty does not affect the amount of your FEGLI coverage. At the end of 12 months in LWOP status, the coverage terminates. But employees get a free 31-day extension of coverage and have the right to convert to a non-group policy.
If a federal employee with FEGLI is called up to active military duty and is killed, regular death benefits are payable to the employee's beneficiaries. Accidental death benefits are also payable under basic insurance (and Option A, if the employee had that coverage) unless the employee was in actual combat (or unless nuclear weapons were being used) at the time of the injury that caused the employee's death.
7. Step and Local pay will also increase your costs.
As you get promoted and as your salary goes up. FEGLI takes a bigger amount of your money. So you are paying a life insurance bill based on how much you’re making based on salary and locality pay and not on your insurability. If you are a healthy person – especially if you are a healthy female federal employee, you will save thousands of dollars to buy your own life insurance policy.
8. Cannot take coverage to a new job.
You can’t take it with you. So when you are young and in the best of health buy a low-cost term life insurance policy and a modest permanent life insurance policy of your own so you have coverage when you leave the federal service. As your health changes as you age during employment and you retire or change jobs, you may not be able to get life insurance coverage outside the federal government.
9. Cannot increase coverage more than 5 times your salary.
Let’s face it. When a typical career federal employee is turning age 50 the life insurance requirement is often higher than 5 times their annual salary. So if supplemental term life insurance is considered and purchased, it might be best to reduce the FEGLI coverage down to the basic level and buy a privately owned term life insurance policy to handle what FEGLI option B was providing. This will save you thousands of dollars over your career. Fill out the quote tool and see how much you can save here at LifePolicyShopper.
10. Coverage is based on a government contract.
Do the words government shutdown, contracts, sequestration, fiscal cliff, budget control act, and deficit leave you wondering at least a little on whether a stable contract will be in place to provide this service with no lapse in federal funding for something this important?
Check out our article FEGLI Calculator.