Last Updated on February 27, 2019 by lifepolicyshopper
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Check out the special spreadsheet that assists you with calculating the total FEGLI cost over your career along with the article Low-Cost Term Life Alternative to FEGLI Option B.
FEGLI Option B or a Universal Life Policy for the Career Federal Employee
FEGLI Option B or a Universal Life Policy for the Career Federal Employee? When a career federal employee turns 50, using the Federal Group Life Insurance Plan gets very expensive. We’ve come to the conclusion that it’s very cost effective in many circumstances, that purchasing a low-cost individual term life insurance policy is less costly and a better option than continuing to pay the higher FEGLI Option B rates. Accordingly, it’s our recommendation to drop FEGLI Option B between the ages 46 and 50, carry the FEGLI basic into retirement and purchase a low-cost individual term life insurance policy with a 25 or 30-year term. Check out where we discuss laddering term riders!
What about Universal Life instead of Option B?
For this article, we will consider - what if a federal employee wants to carry life insurance until the day he or she dies? A federal employee may choose the no-reduction option and continue FEGLI coverage for life. But is this the right choice, or are there other, more cost-effective options? Let’s compare these options and find out.
First, it’s important to note that there are several types of permanent life insurance policies to choose from. For this article, we’ll use a type of life insurance called universal life (UL), which can be structured so that no cash value accumulates and can be guaranteed to remain in force (as long as the premiums are paid), up to at least age 100.
The cost of FEGLI Option B versus Universal Life
Let’s first compare the cost of FEGLI and a UL policy for a 55-year-old male who wants to carry a $250,000 death benefit. Using 2016 OPM rates the FEGLI premium for the 55-year-old male starts out at $2,052 per year, while the UL premium (assuming a standard health rating) is $3,550 per year. As you can see, the FEGLI premium starts out less expensive than the UL insurance policy.
Although, over the course of the first 10 years, the total cumulative cost of the FEGLI insurance is $53,358 while the total cost of the UL policy is $35,500. So far, the UL policy is less expensive by $17,858. However, because the FEGLI premiums increase every five years, and the UL premium remains level, the gap widens over time. In this case, the annual cost of FEGLI becomes more expensive when the FEGLI premium increases to $2,971 at age 65.
From that point on, the annual FEGLI premium becomes increasingly more expensive relative to the UL policy. For example, at age 70, the FEGLI premium increases to $5,191 per year; at age 75, the premium increases to $9,633 per year; and at age 80, the FEGLI premium increases to $14,102 per year, where it will remain level from that point on.
Now, let’s compare the total cost of FEGLI and the UL policy, assuming the federal employee dies at a specific age, say, age 85. In this scenario, the 55-year-old will pay a total of $221,058 for the FEGLI coverage; but if he goes with the UL policy instead, he will only pay a total of $110,050 – a savings of $111,008!
Obviously, an 85-year life expectancy is purely hypothetical and is used only to provide some indication of the potential savings one can achieve by purchasing a UL policy. Ultimately, one’s real age at death will determine whether FEGLI or the UL policy was less expensive.
The Break Even Age
This is where it’s also helpful to know the break-even age, which is the point when the total premium paid for FEGLI is the same as the total premium paid for the UL policy. In the case of the 55-year-old male, the break-even age is approximately age 71. By knowing the break-even age, we now know that, if the federal employee dies prior to age 71, he would pay less in premiums for the FEGLI coverage; but if he lives beyond age 71, he would pay less in premiums for the UL policy.
Another thing to keep in mind is, there is no difference in FEGLI premiums for men and women who are the same age. On the other hand, women pay less than their male counterparts for individual life insurance policies because their longer life expectancies are factored in. For example, a 55-year-old female will pay $3,366 instead of $3,550 for the UL policy. Her FEGLI premium is the same, so she will still pay a total of $221,058 in FEGLI premiums if she lives to age 85; but the total cost of the UL policy drops to $85,157, for a savings of more than $135,901. Older federal employees have the potential to save as well.
Take a 65-year-old male, for example, whose UL premium will run $6,231 per year. Once again, this is initially more expensive than the FEGLI premium, which only runs $2,971 for a 65-year old. However, just as with the previous examples, the annual cost of FEGLI becomes more expensive. In this case, the annual cost of FEGLI becomes more expensive at age 70, and the break-even age of the two insurance plans is age 75. Assuming a life expectancy of 85, the 65-year-old male will pay a total of $196,016 in FEGLI premiums, whereas the payments for the UL policy will only total $130,851 at age 85 – a savings of more than $65,165.
Similar to the 55-year-old female, a 65-year-old female can save even more than her male counterparts with a premium of $4,926 per year for a UL policy. The lower UL premium reduced her break-even age to 71. Once again, assuming a life expectancy of age 85, her total cost for the UL policy is only $103,446, a savings of more than $105,000 over the FEGLI coverage.
Everyone’s circumstances will be different. So when deciding which type of insurance will best fit your needs, you have to think about what the purpose of the life insurance is. At that point, you can begin comparing your options to decide which option is the most cost effective for you.
The tools that I used to compute these rates are the OPM FEGLI calculator and a handy spreadsheet that I found at SlideShare that I recreated – pictured above. Please use these numbers only as a guide to do your own due diligence. It breaks out the annual cost by 5-year cost band. Leave a message here with your email address and I can send you a copy to run your own numbers that will correspond to your own circumstances. We deal with top rated life insurance carriers that offer great universal life products to meet your needs. For this plan, we will look to companies like John Hancock, North American, Voya and Allianz.
To get started on a free no obligation quote on a universal life policy to replace Option B - select the "lifetime" option on the Type of Insurance on the Instant quotes engine to the left. To the left - is a live modern life insurance quote engine that will return a listing of available carrier products based on the information you enter. You will not be taken to a screen to fill in your contact information. There is no need to speak to an agent initially.
Take a look at our article that covers more of the basics on the Federal Employee Group Life Insurance Plan.
Begin your online research to save THOUSANDS on life insurance coverage using Universal Life Insurance instead of FEGLI Option B.