The government’s life insurance program, known by the acronym FEGLI or Federal Employee Group Life Insurance, is one of those benefits where I have seen many federal employees spend tens of thousands of dollars for coverage without truly understanding how it works. It is quite common for people to overpay for something they may or may not actually need or ever use. While the name itself is a bit of an ugly acronym, the program is a massive part of the federal benefits package. To manage your costs effectively, you have to understand the four different parts of FEGLI and how they work, because one specific part is where you are likely to spend a fortune in premiums if you are not careful as you age.
Breaking Down the Four Parts of FEGLI
FEGLI is broken down into four parts: Basic, Option A, Option B, and Option C. Basic coverage is roughly equal to your salary rounded up to the next 1,000 dollars plus an additional 2,000 dollars. If you make 100,000 dollars, you have about 102,000 dollars in coverage. Option A is a small, flat 10,000 dollar policy. Option C allows you to get a small amount of coverage for your spouse and your children. Option B is the powerhouse where you can choose a multiple of your salary from one to five times.
The Option B Trap: Why Your Premiums Double
Option A and Option C are generally never that much coverage and therefore never that expensive. Basic coverage is also relatively reasonable because the government pays for one third of the cost while you are working. However, Option B is where the real danger lies. Because you can get up to five times your salary, you can secure a lot of coverage, but the premiums can get crazy really quickly. This is because Option B premiums are based on two factors: your salary and your age.
When you are 45 years old or younger, the rates for Option B are actually quite good. However, as you move into your 50s and 60s, the price structure changes. FEGLI rates move in five year increments. When you hit 50, 55, 60, and so on, your premiums change automatically. In many of these age brackets, the price of Option B doubles every five years. The government does not usually send a specific warning when this happens; the higher premium is simply deducted from your paycheck. By the time you reach your 60s, Option B can become exceptionally expensive, often costing hundreds of dollars a month for coverage that used to cost a fraction of that.
Audit Your Paystub: Step One to Savings
The first step in stopping the skyrocket of your premiums is to perform a check. Most federal employees I talk to do not pay close attention to the specific line items on their pay stubs. They know some money is going to life insurance, but they do not know which parts they have. You need to look at your Leave and Earnings Statement and identify exactly what you are paying for. Do you have Basic? Do you have Option B at five times your salary? Knowing what you have is the foundation for making a change.
Evaluating Your Actual Need for Coverage
The second step is to answer a difficult question: What do you actually need to keep? Life insurance is not like health insurance. Almost everyone needs health insurance, but life insurance is only necessary if your family would be in a tough financial spot if you passed away. Many people approach retirement and find that their situation has changed. Their Thrift Savings Plan (TSP) has grown significantly, their home is paid off, and their children are grown and independent. For most people, there comes a point where they reach self insurance, meaning their assets are high enough that their family would be okay without a life insurance payout.
If you are taking Option B into retirement, the prices continue to rise every five years. Taking this coverage deep into your 60s and 70s gets so expensive that it makes sense for almost nobody to keep. If you are in good health, you can almost certainly replace this coverage with a private sector policy that is much cheaper and offers a level premium that never goes up.
The Retirement Loophole: The 75 Percent Reduction
However, there is one part of FEGLI that is often worth keeping: Basic coverage. This is the most common part of FEGLI that federal employees take into retirement because of an option called the 75 percent reduction. Here is how it works: If you retire and choose the 75 percent reduction, you continue to pay the same premiums you did while working until you reach age 65. For many people, this is a modest amount between 10 and 30 dollars every two weeks. Once you turn 65, the premiums stop entirely. The coverage becomes free for the rest of your life.
The trade off is that after age 65, the value of the coverage begins to drop by 2 percent each month until it reaches 25 percent of the original amount. For example, if you had 100,000 dollars in coverage, it would eventually level off at 25,000 dollars. For most people who have paid into the system for decades, getting a few tens of thousands of dollars in free life insurance for the rest of their lives is a good deal.
Developing Your Game Plan
In summary, you need to have a game plan. Step one is checking exactly what coverage you have on your pay stub. Step two is evaluating if you still need that amount of insurance based on your current debts and assets. Step three is deciding what to keep. If you need a lot of insurance but the FEGLI Option B rates are skyrocketing, look at the private sector or organizations like WAEPA for alternatives. Do not let your retirement savings be drained by premiums for insurance you no longer need. Make an informed decision now so you can keep more of your hard earned money in your own pocket.