One of the essential decisions federal employees must make during their careers is whether to rely on the Federal Employees’ Group Life Insurance (FEGLI) program or invest in private life insurance. This decision becomes even more critical when considering your financial security not only during your working years but also in retirement.
This article will explore the considerations that can help you determine whether FEGLI or private life insurance makes more sense for your unique circumstances.
Understanding FEGLI
FEGLI is a group term life insurance program designed exclusively for federal employees. It offers basic coverage, as well as several optional coverage types:
- Basic FEGLI: This is automatic coverage for all federal employees, with an amount equal to your annual basic salary rounded up to the nearest thousand dollars, plus $2,000.
- Optional FEGLI: You can choose from several optional coverage types, including Option A (standard flat amount), Option B (multiple of your salary), and Option C (coverage for your spouse and eligible dependent children).
Considerations for FEGLI While Working
- Cost-Effective: Basic FEGLI coverage is relatively affordable, especially for younger employees. However, the cost of optional coverage can increase significantly as you age.
- Convenience: FEGLI is convenient because premiums are automatically deducted from your paycheck. You don’t need to undergo a medical exam to qualify for coverage.
- Limited Flexibility: FEGLI provides basic coverage but lacks some of the customization options available with private insurance policies. This limitation may not meet the unique needs of all federal employees.
Considerations for FEGLI in Retirement
- Premiums Can Skyrocket: FEGLI premiums can become prohibitively expensive in retirement, particularly if you carry optional coverage. This can significantly impact your post-retirement budget.
- Coverage Reduction: At retirement, your Basic FEGLI coverage reduces by 75%, and you must pay the full premiums for any optional coverage you carry.
- Limited Portability: FEGLI coverage ends upon retirement unless you meet certain criteria, such as having coverage for at least five years before retirement. Even then, it may not fully meet your needs if you’re seeking comprehensive coverage.
Private Life Insurance: A Viable Alternative
Private life insurance can offer several advantages over FEGLI:
- Cost Control: Private life insurance policies often provide more cost stability over the long term. Premiums remain relatively consistent, making it easier to budget for retirement.
- Customization: Private policies allow you to tailor coverage to your specific needs, whether it’s income replacement, estate planning, or legacy building.
- Portability: Private life insurance policies stay with you regardless of your employment status, providing uninterrupted coverage in retirement.
- Potential for Cash Value: Some private policies, such as whole life or universal life insurance, offer the potential to accumulate cash value over time, which can be used for various financial goals.
Making the Decision
The choice between FEGLI and private life insurance should be based on your unique circumstances, financial goals, and risk tolerance. Here are some steps to help you decide:
- Assess Your Needs: Determine your life insurance needs based on factors like age, dependents, debts, and financial goals. Will you have your life insurance needs met (debts paid, kids grown, etc..) before the FEGLI premiums get expensive? If so, FEGLI may be all you need. If you see yourself needing life insurance into your 60’s or especially if you’ll need it in retirement, a private plan may make sense.
- Compare Costs: Obtain quotes from reputable private insurers and compare the costs with your current and projected FEGLI premiums. Keep in mind that FEGLI premiums increase at every 5th birthday (ex. Age 50, 55, 60), so be sure to factor in future pricing.
- Consider Future Expenses: Evaluate how your life insurance needs may change in retirement, such as covering long-term care costs or leaving a legacy.
- Examine Portability: Consider whether the portability of a private policy is important to you, especially if you anticipate leaving federal employment before retirement. Starting a private life insurance policy in your 30s or 40s will be much cheaper than in your 50s. If you think it’s possible that you’ll move jobs later in life and you’ll still need the insurance, a private plan could be a good option.
- Seek Professional Guidance: Consult a financial advisor or insurance agent experienced in federal employee benefits to help you make an informed decision.
Conclusion
Choosing between FEGLI and private life insurance is a significant decision. While FEGLI offers convenience and basic coverage during your working years, private insurance may provide more cost-effective, customizable, and portable options for both your career and retirement. Carefully evaluate your individual circumstances, financial objectives, and long-term plans to make the choice that best aligns with your needs and priorities.
If you’d like help processing this decision, or anything else involving financial planning and retirement, register for a complimentary Financial Checkup.
Austin Costello is a Financial Advisor who helps educate federal employees on what it takes to achieve retirement and reduce financial stress. He and his firm, Capital Financial Planners, host educational webinars at various government agencies and work with hundreds of individual clients.
