Life insurance is very important, and the upcoming FEGLI open season is an excellent reminder for everyone to re-evaluate their situation and make sure they are properly covered.
The first step in the process is to determine how much insurance you actually need. The second step is to figure out how best to get it. The entire process should be considered before making a decision.
How much life insurance do I need?
This is the most important question people face when considering life insurance, no matter what stage of life they are in. Newer employees with young families should be thinking of lost income, house payments, child education, etc. Older employees nearing retirement need to consider what sources of income their spouse will have in retirement, any legacy goals, etc.
There are rules of thumb used in the insurance industry (10 times your salary, etc.) that are often used to calculate necessary insurance coverage, regardless of circumstances. FEGLI itself has an implied recommendation of 6 times your salary, since that is the maximum coverage with Basic and the 5x Option B coverage. These are both very unscientific methods, however, and don’t take into account the myriad differences in individual situations.
In order to follow a more methodical approach, you first need to put together your long-term overall income plan. This would include all income sources, such as wages, annuities, Social Security, etc. for all members of your family.
Once an acceptable income plan is put together, you can then recreate it as if you were to pass away in the near future. Wages would be gone; annuities would transition to survivor annuities and only one Social Security benefit could be claimed, as well as other impacts.
Once these impacts are factored in, you only need to add a one-time income source of an insurance payout in varying amounts to determine the necessary coverage. If you do not have an overall plan yet, please see my earlier article on putting one together to demonstrate how we may be able to help.
What if I need more coverage than I currently have? If I have enough, should I keep the type I have?
If you determine through your analysis that additional coverage is needed, the next question is where to get it. There are many options available to you, including FEGLI and outside insurance companies. It is important to compare all of the options in order to make sure you are getting the most cost effective coverage possible. That can even include a combination of different coverages, depending on your need. Remember that the FEGLI is a group term policy, and the rates increase every 5 years. As you get older, the premiums can be significant.
You can apply for insurance through an outside insurance company at any time, which would require you to go through a medical underwriting process. FEGLI coverage does not require medical underwriting when added at the beginning of your career, at a life event (marriage, birth of a child, etc.), or during an open season. If you do decide to make a change in your insurance coverage, it is important to get any new policy in place before stopping payments on your existing coverage.
Should I take advantage of the FEGLI open season?
It has been well over a decade since the last FEGLI open season. There may not be another similar opportunity for the rest of your career, which is why the opportunity this September is so important.
The open season runs from September 1st until September 30th, and only active employees are eligible to increase their coverage. The limits are still 5x for Options B and C, with the addition of Basic and Option A. You can increase from your current level up to those maximums, but cannot exceed them. Keep in mind that coverage can be reduced or eliminated at any time, whether you are working or retired.
There are also some details that are important to understand when considering increasing your coverage, the most consequential of which is that the coverage will not go into force until a year after you sign up. For most people, they will not have the additional coverage until October of 2017. If your coverage needs are immediate, you may want to consider other options as well.
In order to carry the FEGLI coverage into retirement, you still need to have it in force for a full five years. That is from the time it goes into effect and not when you sign up. If you do not have FEGLI coverage now and are planning to retire before October of 2022, any insurance added during the open season will cease at retirement.
Should I consider other options?
Once you know the amount of insurance you need, you can then look for the most cost effective way to get it. FEGLI Basic rates remain consistent while you are working and then change significantly at retirement. FEGLI Optional costs continue to increase every five years. Outside insurance is available under various types as well, with some that hold costs consistent and others that regularly increase.
One of the biggest mistakes people make is to continue with their existing policy without considering whether it is appropriate. That also includes both FEGLI and outside insurance policies. Any time you continue to make a premium payment, it should be an active choice whether you still want to make the same purchase.
One advantage to the FEGLI open season is the lack of medical underwriting. If you have any kind of medical condition that might affect your ability to get insured elsewhere, it might be prudent to sign up for the increased FEGLI now.
What other options are there?
There are two main types of alternative insurance options available from outside insurance companies that might be considered as options to FEGLI. These options include term insurance and permanent insurance.
Term life insurance is one of the most straight-forward and easy to understand options available. It is a pure purchase of insurance only, where you select a coverage amount and a term and medical underwriting then determines the premium.
You are covered for as long as you pay the premium until the end of the term. 20-year terms are some of the most common, but you can also get 10 or 30 year policies. For some people whose insurance needs will change over time, you can look at multiple policies of different term lengths, so that some of the cost is eliminated over time as the need decreases.
Permanent insurance can come in several types, including universal life, whole life, and others. You will remain insured as long as the costs are covered, but those costs for the insurance can go up over time.
Early in the policy, the premiums are higher than the actual cost, and a cash value can be accumulated. The cost typically goes up to exceed the premium over time, and some of that cash value is used to make up the difference.
There are many differences between various types of permanent insurance. Some will have a premium that can change. Some will have different investment options for the cash value. Others will have additional “riders” (for long-term care coverage, etc.) that can be added to the policy at an additional cost. Permanent policies tend to have premiums that are higher than term policies, which include a much higher commission to the insurance salesman. It is important to know that if you are recommended a permanent policy.
What should I do going forward?
If you believe you may have a need for additional insurance coverage, it is worthwhile to look at the FEGLI open season as an option. Look up the premiums first, however, as they may be unaffordable depending on your age. If you have any medical issues, the open season may be your best opportunity to get insurance at all.
With the tight deadline, it is also possible that you won’t have time to go through the planning process to find out how much coverage you need, or the time to pursue other options to find the most cost effective one. Keep in mind that there is a year delay between the open season sign-up and when the insurance would kick in.
Since you can decrease or eliminate FEGLI coverage at any time, you would always have the option to undo an addition before paying any premiums for it. A common strategy may to be file for additional coverage under FEGLI and pursue outside insurance options at the same time. If an outside policy comes back as more cost effective, you can always drop the added FEGLI amount.
Depending on the route you choose, there may be an opportunity to save money on premiums. If you are able to reduce your monthly cost, I suggest taking those savings and using it to increase your TSP contributions. One of the keys to a successful long term income plan is to keep the budget consistent. Artificially inflating your take-home income due to insurance premium savings makes that budget harder to meet in the future.