Having life insurance coverage is one of the most important ways you can protect your family from financial burdens. With life insurance being such an important part of your family’s financial protection, it is crucial that you select the right type of insurance. Federal employees are automatically enrolled in Federal Employee Group Life Insurance (FEGLI). However, this default option may not provide the best coverage for you and your family.
There are several different types of life insurance, such as Whole Life, Universal Life, Term Life, and more.
So the question is, should you replace your FEGLI and if so, what should you replace it with? To start, we first need to understand exactly what FEGLI is, how it works, and if FEGLI is the right choice for you.
What is FEGLI?
FEGLI is your Federal Employee Group Life Insurance. FEGLI covers more than 4 million federal employees and is one of the largest group life insurance programs in the world. The United States government started the program in 1954 to provide life insurance for federal employees and their families.
Your FEGLI coverage is subsidized by the federal government, which means you’ll probably pay less for coverage earlier in your career. However, the rates are not constant and will not be the same in the future. Since FEGLI is a 5-year renewable term life insurance product, your rates will increase every 5 years.
FEGLI has different rules than other private insurance providers, which is why it is very important for you to understand the basics of FEGLI before making any life insurance decisions.
How does FEGLI work?
FEGLI is specifically for those who are employed by the federal government. New employees are automatically enrolled into FEGLI Basic; however, you have the option to waive your Basic enrollment and look for your own private life insurance.
FEGLI Basic is determined by your annual salary. Coverage is equal to your annual salary rounded up to the nearest thousand, plus $2,000. FEGLI costs around $0.16 per every $1,000 dollars of yearly coverage. FEGLI Basic is free for postal employees. The cost of Basic is split between the federal employee and the government. Employees pay two-thirds of the total cost and the government pays one-third. Age is not a factor in the cost of FEGLI Basic.
FEGLI Option A
Option A is simply an additional $10,000 in coverage. This option is best for those who only want their funeral expenses covered. However, depending on your wishes, the cost of a funeral may exceed $10,000. The cost for Option A increases every 5 years.
FEGLI Option B
Option B is the most flexible FEGLI coverage. It allows you to select a coverage amount anywhere from 1 to 5 times your annual salary. Keep in mind that the price you pay for Option B is determined mostly by your age. Younger employees will pay much less than older employees. Option B is a 5-year renewable term product and the cost will increase every 5 years.
FEGLI Option C
Option C allows you to add coverage for your eligible spouse or children. It is also a flexible coverage option and allows you to select a coverage amount. Coverage for your spouse starts at $5,000 and additional coverage is available in multiples of $5,000 with maximum coverage of $25,000. Coverage is also available for dependent children. Children must be under the age of 22 unless they have special needs. Coverage for children starts at $2,500, and additional coverage is available in multiples of $2,500 with a maximum coverage of $12,500. The cost for Option C increases every 5 years.
5 Reasons to Consider Replacing Your FEGLI
Your monthly premiums for FEGLI will not stay the same, they will continue to increase as you get older. FEGLI becomes significantly more expensive for those that are age 50 and older.
In addition, your FEGLI Coverage will actually decrease as you get older, which will result in you being required to pay much more to receive less coverage.
Reduced Retirement Coverage
FEGLI does not give you an option to continue your coverage after retirement and all of the different coverage types, particularly FEGLI Basic, will decrease significantly when you retire.
The default and most common FEGLI Reduction Option is the 75% Reduction Option. This means your coverage begins to decrease by 2% each month after you retire until it reaches 25% of the original amount.
An upside to the decreasing coverage is that you will no longer have to make payments. After you retire (at age 65), you can still receive your decreasing FEGLI coverage without making any more payments.
FEGLI Offers ZERO Cash Value Accumulation
Cash Value Accumulation is one of the best benefits of a Permanent Life insurance policy. The premiums you pay are used to build up cash value, among many other benefits, depending on the company and product type.
However, with FEGLI the premiums you have paid over many years are simply gone. FEGLI does not give you the option to accumulate any type of cash value. The reason for this is that all of the FEGLI Coverage Options are 5-year renewable term life products. Term life products are the only products that FEGLI has to offer.
If you are looking for a permanent life insurance product, you will not find one with FEGLI.
FEGLI Has No Conversion Options or Riders
A term life product outside of FEGLI can be customized in many different ways with several different types of riders to best suit you and your family’s needs. Unfortunately, FEGLI can’t offer any conversion options or riders.
Low Coverage Limits May Not Be Enough
FEGLI gives you the option to have coverage up to five times your annual salary. This may work well for you when you are younger or don’t have anyone depending on your income. However, five times your annual salary may not be enough for you to protect your family if you were to unexpectedly pass away.
Later in your career, you may find yourself purchasing a secondary policy later with more coverage. Generally, the later you purchase a life insurance policy the more expensive it will be.
While FEGLI does have its benefits, it also has its limitations. As an affordable life insurance option, FEGLI may be the right choice for many people, especially at the start of their careers. However, we recommend looking into other life insurance options, especially as your needs change. Whole life and outside term life policies offer several more benefits that aren’t available with FEGLI.
You have a lot of life insurance options available to you. Just because you are automatically enrolled in FEGLI, does not mean you shouldn’t search for other life insurance options. Once you start looking for life insurance outside of FEGLI, there are far more options to choose from. Different insurance companies all offer their own specific life insurance products. Limiting yourself to only what FEGLI offers may mean you don’t get the coverage you’d like to have for your and your family’s peace of mind.
If you’re interested in more information about life insurance products, help with understanding FEGLI, or want to explore combining FEGLI coverage with an outside life insurance policy, we can help. Use the form below to get in touch with a United Benefits Specialist. We are happy to help you compare your FEGLI options to with other life insurance products.