What happens when a federal employee’s working days come to an end and they enter into retirement? What options are available to them in their golden years?
Many people make the mistake of believing that they don’t need to know this because they are years from retirement and they will deal with it when the time comes. I would implore them to investigate their options sooner rather than later. It would be in their best interest to know what’s available before they retire.
When filling out retirement papers and being presented with choices, that is not the time to try and scramble to learn about the different options. As Plato said, “A good decision is one based on Knowledge.” Put another way, an easy decision is one where you already have all of the facts.
Let’s examine what life insurance options are available under the Federal Employee Group Life Insurance (FEGLI) program to federal employees as they enter into a new season of life: retirement.
In my previous article on FEGLI, I discussed the different parts of the federal life insurance program and the options available while working. You should read that article prior to this one to understand the options I review below.
To keep your FEGLI Basic in retirement, you must have been insured with your basic coverage for at least five consecutive years to retain your coverage in retirement. You will be given three choices in how you are able to keep your Basic Coverage if you wish to. This is where people make a choice so we will examine the options carefully.
75% Reduction Option
The first choice is called the 75% reduction option. If you choose this option, a reduction begins the second month after your 65th birthday, or the second month after you retire, whichever is later. At that time, your original coverage amount will begin to decrease by 2% each month until it reaches 25% of the original amount. It will remain level at that value for the rest of your life.
Prior to the coverage starting to reduce, it will cost you 32.5 cents per thousand. Here is the real selling point of this option though: after it begins reducing, your basic coverage is free and you will never pay another premium for it.
Let’s see what all of that jargon means in real terms. For example, let’s say that when you retire at age 60, your basic coverage is a $100,000 death benefit and you choose the 75% reduction option.
After you turn 65, the death benefit begins reducing by $2,000 until it reaches $25,000. It will remain at that $25,000 value for the rest of your life.
Prior to age 65, this benefit cost you $32.00 per month. After the age of 65 when it began reducing it costs you nothing. Once it reaches the full reduction amount, you will have a free $25,000 death benefit from that moment on.
50% Reduction Option
The second choice is known as the 50% reduction option. This option as you would assume allows you to keep half of your Basic coverage.
The reduction on this coverage also begins the second month after your 65th birthday, or the second month after you retire, whichever is later. However, it only goes down by 1% a month until it arrives at 50% of the original coverage amount.
Prior to it reducing, it will cost you 96.5 cents per thousand. After the reduction begins, the cost will go down to 64 cents per thousand until you die, cancel it, or decide to reduce it to the 75% deduction option.
Allow us to revisit the example above. You retire at age 60 with $100,000 in Basic coverage. If you chose this 50% reduction option, it would cost you $96.50 per month until the reduction begins. After the monthly reduction begins, your cost would be $64.00 a month.
No Reduction Option
The final choice is the No Reduction option. If you feel you would like to keep your entire Basic Coverage amount, this is the option you would choose.
This option would cost you $2.265 every month per thousand prior to the age of 65 and $1.94 each thousand after.
Applying these figures to our previous scenario, your $100,000 would cost you $226.50 each month before age 65 and $194.00 every month after. Your $100,000 never reduces; the entire amount always remains.
Hopefully all of that information clarifies how your Basic coverage options work in retirement. You can see why it might be a good idea to research this and apply the above numbers to your individual situation prior to commencing the retirement process. Please note if you do not choose an option on your papers, it will default to the 75% reduction option.
Cost for each $1,000 of the Basic Insurance Amount in Effect at the Time of your Retirement
|Time||75% Reduction||50% Reduction||No Reduction|
|Until the Month after your 65th Birthday||$0.325 monthly||$0.965 monthly||$2.265 monthly|
|Starting the Month after your 65th Birthday||Free||$0.64 monthly*||$1.94 monthly*|
* You will continue to pay premiums for life (unless you cancel or subsequently elect 75% Reduction).**
FEGLI Option A
What happens to your Option A , the flat $10,000 additional coverage, when you retire?
The amount of Option A automatically reduces when you reach age 65 (or retire, if later). There is no election to be made. The amount of coverage reduces by 2 percent each month until the amount reaches 25 percent of the original amount.
Only 25 percent of the original amount ($2,500) is payable as a death benefit once the full reduction has been reached. There is no premium after age 65.
FEGLI Option B
Let’s review what your options are for your optional 1 to 5 additional multiples you could have selected through option B. When you retire you have two basic choices:
Full Reduction Option
The first choice is a full reduction option. If you choose the full reduction option, at the magic age of 65, or when you retire if you’re older than 65, your coverage will reduce by 2% a month until after fifty months your coverage is gone. People choose this option because once the reduction has begun, there is no premium!
No Reduction Option
The second choice is a no reduction option. This is where you keep your Option B into retirement.
If the full benefit remains, the full premium remains. The premiums are the same cost for retirees as they are for employed workers.
The cost is based on your age and can go up with a new attained age bracket, just like when you were working.
You can reduce multiples going into retirement. For example, if you had 3 times your salary as you go into retirement, you can choose 1, 2 or 3 multiples in retirement. See the Option B chart posted in the previous article for cost breakdown. Also, at any time in retirement, you can choose to switch to the full reduction option.
FEGLI Option C
Wrapping up your coverage options is the Family Coverage, Option C.
Your options are the same as Option B. You can choose a “full reduction” or a “no reduction” of your coverage on your family.
Just like Option B, the full reduction time will reduce by 2% a month until the coverage is depleted. There is no premium for the full reduction option once the reduction begins.
Also similar to the Option B, if you choose a no reduction option, you keep your full Option C coverage but you continue to pay a premium based on your age.
As you can see, there is a lot of information and a lot to consider for your Federal Employee Group Life Insurance when you retire. This is why examining what you currently have and what you need in retirement is important. Once you establish what coverage you do or don’t need in retirement, you can decide which options you will utilize for each area of coverage.
Before canceling or reducing coverage, you want to be sure that is what you want to do. In most cases that decision is irreversible. You can research your options on OPM’s website. It is also wise to speak to a life insurance professional that is familiar with Federal Benefits for guidance.
Jesse Black specializes in Federal Employee Retirement Planning. He is passionate about assisting federal employees and has assisted thousands of them to plan for a more secure retirement. He has over 17 years industry experience and was interviewed in the Wall Street Journal about federal retirement.
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