For most Federal employees, approaching retirement is an exciting time – one when you can reflect on your many years of hard work and, if you were prudent, look forward to living comfortably on the nest egg you’ve built through your ongoing contributions to your TSP account.
Given that the “end date” of your service likely aligns with that of many of your largest financial responsibilities, for example your mortgage or a child’s college tuition, it’s likely an opportune time to reevaluate your life insurance needs and options.
Many people assume they only need life insurance to protect their family from the unexpected loss of the household breadwinner when they are young, but this isn’t always the case.
- If you will have two people in the home receiving a pension and/or social security check in retirement, life insurance may be necessary to help supplement the loss of income that would result from you or your spouse’s death – especially when you consider that your reduction in household income may be greater than your reduction in living expenses.
- In another scenario, life insurance may be a smart way to complete a tax-free transfer of wealth to your heirs.
- Finally, a policy may be a financially-savvy way to maximize your pension as you approach retirement. Using this strategy, you would select a minimal option for the survivor benefit for your spouse and use your savings to purchase a life insurance policy. This would not only provide your spouse with income equal to or greater than a survivor benefit if you pass away, but also allow you to designate your children or other family members as the beneficiary if your spouse dies before you.
And though you may think that FEGLI has you covered in cases such as these, it’s important to understand how the reduction schedules and rate increases of each FEGLI option change as you age.
FEGLI in Retirement
As long as you had your FEGLI coverage five years prior to your retirement and are receiving a retirement annuity, you have an option for life insurance reduction at retirement.
The basic insurance benefit is equal to your salary when you retire (rounded up to the next higher $1,000) plus $2,000 and, as the following table shows, the premium will depend on the specific reduction you select.
|75% reduction in coverage after retirement||Pay $0.325 per $1,000 per month until age 65, then no cost thereafter.||At age 65* coverage reduces 2% per month until your coverage equals 25%|
|50% reduction in coverage after retirement||Pay $1.035 per $1,000 per month until age 65, then $0.71 per $1,000 per month thereafter||At 65* coverage reduces 1% per month until your coverage equals 50%|
|No Reduction in coverage after retirement||Pay $2.455 per $1,000 per month until age 65, then $2.13 per $1,000 per month thereafter.||No reduction.|
If you are enrolled in Option A, you can take this $10,000 coverage into retirement. Premiums are based on and increase with your age. There is a 75% reduction in coverage for Option A. At age 65, premiums cease, and the value of the coverage will reduce 2% per month until it stops reducing when your coverage equals 25%.
You may also take your Option B coverage into retirement. Depending on your choice when you enrolled in this coverage, you have one-five times your annual basic pay (rounded up to the next $1,000). Option B premiums are also based on and will increase with your age. You can choose to keep any multiple from Option B. For example, if you have five times your pay you can choose to eliminate the reduction for two of those multiples.
Finally, you can take Option C, family coverage, into retirement. This coverage is up to five multiples of $5,000 for a spouse and up to five multiples of $2,500 for each eligible child. Your premiums are based on and increase with age.
For Option B and Option C, at retirement you are given a choice of either 100% reduction or no reduction. If you elect 100% reduction, at age 65, you will no longer pay the premium, but your coverage will reduce 2% per month until it ceases. If you elect no reduction, you will continue to pay the premium based on your age. You are able to cancel at a later date if you choose.
As you can see, the options are many but far from simple.
What Works For You?
The first step of deciding whether or not reduced FEGLI coverage can meet your family’s needs and your goals in retirement is assessing those needs and goals as honestly and thoroughly as possible.
You can then work with a financial advisor or insurance consultant to help decide what strategy makes the most sense for you and your time horizon, whether it’s reduced FEGLI; an individual term, universal or whole life policy; or a “laddering method,” which allows separate policies to cover specific risks during the particular time frame when you need them covered (and no longer).
As long as it works for you, you’ll be able to mark yet another important box on your financial checklist “done” as you head into – and through – retirement.
As the Product Manager for the Government Employees’ Benefit Association, Shelly Giuliano is the subject matter expect for insurance products and provides objectivity to the many insurance options federal employees have. She is responsible for researching and evaluating insurance plan features to support the needs of GEBA members and federal employees.