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Federal Employees Should Evaluate the Cost of Life Insurance
There has been much written recently concerning the increasing cost of health insurance. For federal employees, on Oct. 1, 2010 the Office of Personnel Management (OPM) announced that the average premiums paid for health insurance plans that participate in the Federal Employees Health Benefits Program (FEHBP) will increase on average by 7.2 percent for 2011 over what they were during 2010. During the upcoming FEHBP Open Season (November 8 through December 13, 2010, inclusive), employees and annuitants will have an opportunity to change their FEHBP health insurance plan for 2011.
But federal employees -- especially those who intend to retire in the next few years -- need to also check the premium cost of their life insurance. Many employees participate in the Federal Employees Group Life Insurance (FEGLI) program. The good news about FEGLI is that when an individual enters federal service, FEGLI coverage is nearly automatic -- no matter the health status of a new or a rehired employee -- the employee qualifies for FEGLI coverage without the need to furnish evidence of insurability. On the other hand, the disappointing news about FEGLI is that for many employees FEGLI premiums are more expensive compared to what these employees may be able to purchase in an individual life insurance policy from a private insurance company. Of course, the individual would have to qualify -- that is, furnish evidence of insurability -- in order to purchase an individual life insurance policy from a private insurance company.
To understand why FEGLI tends to be expensive, it is important to review the different parts to FEGLI and their premium costs. Note that FEGLI is a group term life insurance policy, meaning that it covers a group -- all federal employees and annuitants and eligible family members. As such, premiums are actuarially determined for the group by the insurance company in charge of the FEGLI program -- Metropolitan Life Insurance Company. Also, as a term life insurance policy, FEGLI builds up no cash value.
There are three parts to the FEGLI program in which the employee's term life insurance coverage is determined. They are:
• Basic Life. Basic life is an employee's annual salary rounded up to the next $1,000 plus $2,000. Employees under age 45 are provided extra coverage without paying an additional premium. The cost for all employees of the Basic life insurance is $0.15 per $1,000 of coverage biweekly. Employees pay 2/3 of the premium cost and the federal government pays the remaining 1/3 of the premium cost.
Here is an example:
Salary = $97,500
FEGLI Basic insurance = $98,000 plus $2,000 or $100,000
Cost is 100 x $0.15 (biweekly) or $15.00. Assuming there are 26 pay dates per year, the annual cost per year of the Basic FEGLI insurance is 26 x $15 or $390 per year.
There are also three types of optional coverage that an employee may elect. Two of these coverages are for the employee and the other coverage is for eligible family members. Only the employee coverage is discussed here. They are:
• Option A: Standard. Additional coverage of $10,000; and/or
• Option B: Additional coverage. This a multiple of one to five times an employee's annual basic pay.
Employees pay the full cost for optional coverage.
Note that the rather steep increasing cost of the additional coverage every five years once the employee becomes age 45.
Note the cost of the FEGLI under the following conditions:
(1) Salary = $97,500 (Basic FEGLI insurance =
(2) Standard Coverage of $10,000
(3) Additional of two times salary = 2 x $97,500 = $195,000
Total FEGLI coverage equals $100,000 + $10,000 + $195,000 = $305,000
Note how the cost of total FEGLI coverage has increased from $549.90 for an employee who is younger than age 35 to $6,630.00 for an employee who is age 70, increasing nearly 13 times in cost over 35 years. An employee who is in relatively good health could most likely obtain cheaper term life insurance by purchasing an individual policy from a private insurance company.
An employee is eligible to continue FEGLI insurance into retirement if the employee:
- retires on an immediate annuity (one that begins within 30 days after separation) or a postponed annuity under the MRA + 10 provision of FERS;
- has been enrolled in FEGLI for at least the five years preceding the starting date of the employee's annuity (or for a FERS retiree who elected a postponed annuity, the five years immediately preceding the employee's separation) or if less than five years for the entire period that coverage was available to the employee;
- has not converted FEGLI insurance to an individual whole life insurance policy; and
- has not waived coverage of basic life insurance.
Assuming all conditions are met, a retiring employee is eligible to maintain the FEGLI Basic and optional coverage that was in effect on the last day of his or her employment. But a retiring employee can also decide shortly before his or her retirement date to reduce the Basic and optional coverage.
The decision to keep or to reduce the full FEGLI Basic and additional coverage must be made shortly before an employee retires. Form SF 2818, downloadable from http://www.opm.gov/insure is used to reduce FEGLI Basic and additional coverage. If Form SF 2818 is not filled out and submitted by a retiring employee, then the full FEGLI Basic and additional coverage will be maintained during the employee's retirement years. But as will be shown below, the cost of full FEGLI basic skyrockets after an employee retires.
The following table summarizes the cost of FEGLI Basic insurance upon an employee's retirement:
*Per $1,000 per month of life insurance
The amount of FEGLI Basic insurance is a retiring employee's FEGLI Basic insurance amount on the day of his or her retirement.
Consider the cost of the FEGLI Basic Coverage for the employee in the example above who retires with $100,000 of FEGLI Basic insurance. Suppose the employee retires at age 60. The cost of the FEGLI Basic insurance for the three options is summarized in the table below:
* Starting the month after the annuitant becomes age 65, coverage is reduced by 2% of $100,000, or $2,000 per month, until it reduces to $25,000.
** Starting the month after the annuitant becomes age 65, coverage is reduced by 1% or $100,000, or $1,000 per month, until it reduces to $50,000.
Note that if the employee chooses not to reduce the FEGLI basic coverage shortly before he or she retires, then the monthly cost of the FEGLI Basic insurance goes from 0.30 times $100, or $30 per month, to $215.50 per month until the annuitant becomes age 65; thereafter the cost of the full FEGLI Basic insurance is $183.00 per month.
Those employees who are covered under Option A (standard coverage) may continue their Option A coverage in full after they retire until they reach age 65. Starting the month they become age 65 (or the month after they retire if they retire after age 65) Option A coverage will be reduced by two percent per month until it reaches $2,500. There are no other choices for Option A other than to cancel the coverage altogether.
Employees who are covered by Options B (additional) and Option C (family coverage) may choose full or no reduction for all multiples. The following summarizes the cost:
• Full reduction - age 65 and retired, the amount of Option B and/or Option C coverage will begin to reduce at the rate of two percent until it reaches zero.
• No reduction - at age 65 and retired, the full amount of Option B and/or Option C coverage will continue for life unless a retiring employee changes it to full reduction (via Form SF 2818 to be submitted shortly before an employee retires).
The following table summarizes the monthly cost of Options B and C:
For the employee in the example above who retires with an annual salary of $97,500 and Basic insurance of $100,000 and who elects to keep for retirement Option B at twice the salary ($195,000), the cost will be as follows:
What would be the cost to this retiring employee of keeping the full Basic ($100,000) and twice the salary (Option B) ($195,000) for this retiree ($100,000 + $195,000) = $295,000?
Note that the total premium cost more than doubles between ages 55 and 70. These premiums are obviously very expensive and could well go beyond the affordability of many retirees.
All employees -- but especially those employees who are within five years of their anticipated retirement date -- are therefore encouraged to evaluate their life insurance coverage and options. Those employees currently enrolled in FEGLI who are in relatively good health should contact a licensed life insurance broker in order to seek a comparison of the cost of an individual term life insurance policy to the cost of FEGLI group term life insurance coverage.
About the Author
Edward A. Zurndorfer is a Certified Financial Planner, 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. He is an instructor at federal employee retirement seminars throughout the country for the National Institute of Transition Planning, Inc. and writes numerous columns and books on federal employee benefits.