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Articles | Do Federal Employees Need Life Insurance During Retirement?
Do Federal Employees Need Life Insurance During Retirement?
Do federal employees need life insurance after they retire? Most employees have
a need for some life insurance coverage while they are working -- for example,
income protection for dependents and to pay the balance of a large debt such as
a mortgage in case of an untimely death. But as retirement gets closer,
some if not all of these reasons for having life insurance go away.
Many in the insurance industry would disagree that life insurance is not
needed during one's retirement years. Certainly, there are retiring employees
who are carrying a mortgage into retirement and want to make sure their mortgage
will be paid off using life insurance proceeds in the event they die before
their mortgage is paid off. Along with an uncertain economy, many
individuals today are seeking ways to build up savings and protecting loved ones
during their retirement years. But as explained below, life insurance should not
be a substitute for a survivor annuity from a federal employee's CSRS or
Unfortunately, there are some life insurance professionals who often pitch
life insurance to older individuals as a pension supplement, an investment or an
estate-creation tool. But since most federal employees by the time they retire
have a fairly good size estate with their CSRS or FERS annuity, their Thrift
Savings Plan (TSP), IRAs and other savings and investments, they should
not need life insurance as a means of building a savings "nest egg" for loved
It is true that life insurance can be an effective tool as an estate planning
or charitable giving strategy for wealthy individuals. For example, death
benefits from a life insurance policy can be used to pay federal and state
estate taxes that would otherwise have to be paid by selling investments or
liquidating assets at a discount.
But for most federal employees, buying life insurance during the years
close to their retirement date or carrying a large amount of life
insurance into retirement is likely unnecessary.
The following are some considerations for federal employees who are
getting close to their retirement with respect to their life insurance needs
- Keeping full Federal Employee Group Life Insurance (FEGLI) "Basic" coverage
during retirement results in a nearly 700 percent increase in premium costs.
Those employees who are enrolled in the government's FEGLI group insurance plan
will pay significantly more in FEGLI premiums if they choose to retain their
full amount of FEGLI coverage.
- Term life insurance bought from a private life insurance company is
increasingly more expensive as an individual gets into their mid-to-late
fifties. This assumes of course that the individual can qualify for life
insurance by furnishing evidence of insurability, such as having the insurance
company check their medical records and perhaps going through a medical
examination. For example, a healthy 40 year old male can buy $500,000 of a 20
year "level term" life insurance policy at a cost of $500 per year. That same
individual could pay $6,000 a year for the same coverage if it is bought at 65.
- Cash value life insurance is actually more expensive than it appears. Cash
value life insurance policies combine a pure death benefit- term insurance- with
an investment account. Policyholders pay the premiums on their policies each
year and the insurance company deducts fees, commissions and the cost of
insurance from the premiums. The problem is that with a cash value life
insurance policy the premiums are "front loaded", meaning that most of the
premiums paid in the early years of the policy are paying for the pure death
benefit, leaving little of the premiums paid in the early years of the policy to
be invested and subsequently grow.
- Cash value life insurance is a costly investment. Sale commissions and fees
can consume almost all of the premiums paid in the first year. High annual costs
can offset much of the policy investment income earned in subsequent years of
the policy. Moreover, when individuals invest in "open ended" funds, the funds
are required by the Securities and Exchange Commission to disclose their fees on
an annual basis. This makes it difficult to find out how a cash value life
insurance performed as well as to determine the cost of the insurance and other
Life insurance agents typically show illustrations of how much a cash value
policy will grow over the years. If the growth estimated is overly optimistic
and the actual growth is lower than illustrated, then the annuitant may be
forced to contribute higher premiums in later years. This could end up being a
financial challenge to many annuitants.
- Life insurance as a substitute for a CSRS or FERS survivor annuity. For
years, some life insurance agents have advised and encouraged federal
employees nearing retirement to elect to take their CSRS or FERS annuity as a
life annuity that will end at their death, instead of electing a reduced annuity
which will provide for a survivor annuity -- usually paid to a spouse - at the
time of their death. The survivor annuity, as much as 55 percent of what the
annuitant was receiving at the time of death, would continue over the life of
the survivor annuitant.
The monthly savings resulting from a life annuity with no deduction for the
cost of a survivor annuity would be used to buy a life insurance policy. At the
death of the annuitant, the insurance proceeds would be paid in a lump sum
payment to the surviving annuitant. If this sounds rather simple, it is
not. In order to make that strategy work, one would need to estimate the value
of the annuity payments that the survivor annuitant would forfeit, and buy
enough life insurance to replace that amount.
If a CSRS or FERS annuitant elects -- with the written notarized consent of
their spouse not to give a spousal survivor annuity -- then at the death of the
annuitant a non-federal employee spouse would lose the government's health
insurance benefit, the Federal Employees Health Benefits (FEHB). While some
insurance agents are aware of this, they choose not to mention or ask this of an
annuitant. This is not surprising given that the insurance industry does not
profit when an employee elects a full survivor CSRS or FERS annuity.
About the Author
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Financial
Consultant, Chartered Life Underwriter, Registered Health Underwriter,
Registered Employee Benefits Consultant and Enrolled Agent in Silver Spring, MD
-- and the owner of EZ Accounting and Financial Services, an accounting,
tax preparation and financial planning firm also located in Silver Spring,
MD. Zurndorfer is also is an instructor at federal employee
retirement seminars throughout the country and writes numerous columns and books
on federal employee benefits.