Choosing the Best Life Insurance Coverage for Federal Employees

This is the first of five columns helping federal employees understand their choices when it comes to life insurance. This column explains life insurance and which individuals should seek life insurance coverage.

By understanding how life insurance works and how to shop for a life insurance policy, a federal employee can find the best life insurance coverage to meet that employee’s needs.

What is a Life Insurance Policy?

SEE ALSO:

• 10 Most Common Mistakes to Avoid When Purchasing Life Insurance
• Federal Employees Should Review Their Life Insurance Needs and Choices

A life insurance policy is a contract between an insurance company and the policy owner. The policy owner must pay a single premium upfront or pay regular premiums over time in order for the life insurance policy to remain in force. The insurance company (the insurer) promises to pay a death benefit to a named beneficiary when the insured person (usually the policy owner) dies.

When the insured person dies, the policy’s named beneficiary will receive the policy’s death benefit income tax-free.

A term life insurance policy expires after a certain number of years. Permanent life insurance policies remain in force until the policy owner dies, stops paying premiums, or surrenders the insurance policy. A life insurance policy is only as good as the financial strength of the life insurance company that issues it.

Which Individuals Are Advised to Purchase Life Insurance?

The purpose of owning a life insurance policy is to provide financial support to surviving dependents or other potential beneficiaries after the death of an insured policyholder. The following are examples of individuals who are advised to purchase life insurance:

1. Parents with minor children. If a parent with minor children dies, the loss of the parent’s income and/or caregiving skills could create a financial hardship. Life insurance can make sure the children will have the financial resources that they need until they can support themselves.

2. Parents with special-needs adult children. For children who require lifelong care and who will never be self-sufficient, life insurance can make sure their needs will be met after their parents pass away. The life insurance policy death benefit can be used to fund a special needs trust that a fiduciary will manage for the adult child’s benefit.

3. Adults who own property together. If two adults (such as a married couple) own property together, then the death of one adult might mean that the surviving adult could no longer afford loan payments, upkeep and taxes on the property. A “first to die” joint life insurance policy in which each owner is named as the life insurance “first-to-die” beneficiary, is recommended.
4. Young adults in which a parent or grandparent incurred private student loan debt or cosigned a loan for the child or grandchild. Young adults without dependents may not have a need to purchase life insurance. However, if a parent or grandparent of a young adult will be responsible for a young adult’s debt (such as student loans) after the young adult’s death, the young adult may want to purchase a life insurance policy naming the parent or grandparent as beneficiary, making sure the death benefit is sufficient to pay off the balance of the young adult’s debt.

5. Stay-at-home moms and dads. Stay-at-home parents should have life insurance as they contribute significant economic value based on the work they do in the home. According to Salary.com, the economic value of a stay-at-home parent during 2023 would be equivalent to an annual gross salary of $184,820.

6. Wealthy families who expect to owe federal and/or estate taxes. Life insurance can provide funds to cover death taxes including estate and inheritance taxes.

7. Families who cannot afford funeral and burial expenses. A small life insurance policy can provide funds to pay for funeral and burial expenses.

8. Those will pre-existing medical conditions such as cancer, heart disease or smoking. Some insurance companies may deny insurance coverage for these individuals or charge extremely high premiums. But employer-sponsored group life insurance policies (such as the Federal Employee Group Life Insurance (FEGLI) program) allow permanent employees to purchase the group life insurance without having to furnish evidence of insurability (called “guaranteed issue” life insurance).

Benefits of Owning a Life Insurance Policy

There are several benefits associated with owning a life insurance policy. Among the most important features and protections offered by life insurance policies are that:

(1) Most individuals use life insurance to provide tax-free funds to beneficiaries who would suffer a financial hardship upon the insured’s death; and

(2) Wealthy individuals benefit from several tax advantages associated with a cash-value life insurance policy, including the potential tax-free growth of cash value and a tax-free death benefit payable to named beneficiaries. These tax advantages can provide strategic planning opportunities for wealth transfer from one generation to the next generation.