If you are a federal employee and/or in the Federal Employees Retirement System, you are likely dependent on FEGLI Life Insurance and FERS Survivor Benefits for making certain your spouse or partner receives a sufficient financial benefit in the event of your death.
Many federal employees who are enrolled in these programs are likely unfamiliar with the survivor benefits because they’ve likely been in their program for two or more decades.
Certainly, it’s important for you to know how much money will be available for surviving loved ones when you die, but do you know? And, just as importantly, do you know how much your benefits are costing you?
In this article, we cover the money saved for a federal employee that is using FEGLI Life Insurance optional coverage when they turn age 50. Here, we’ll illustrate the savings realized when using term life insurance instead of or in addition to a federal employee survivor benefit plan.
What is FEGLI?
If you are a new federal employee or have forgotten how FEGLI life insurance works, let’s get started by going over the basics.
FEGLI (Federal Employees’ Group Life Insurance) is a group term life insurance program available to federal employees upon being hired by the government. It’s important to know that this life insurance does not have a cash value component and you cannot borrow against the policy.
Although FEGLI is a government program for government employees, the insurance is underwritten and administered by MetLife, a highly rated insurance company, and well-known in the insurance marketplace.
The FEGLI life insurance program provides different levels of life insurance:
Basic – The FEGLI Basic Insurance Program is provided to every federal employee automatically upon being hired unless he or she has specifically opts-out of the program. The government pays for a third of the premium and the employee pays the remaining two thirds. The amount of coverage under the basic program amounts to the amount of your basic annual pay, rounded up to the next $1,000 plus an additional $2,000. This is referred to as your Basic Insurance Amount (BIA).
If you are employed by the Postal Service, however, the U.S. Postal Service pays the entire premium for all of its employees. Once an employee is enrolled in FEGLI Basic, they can elect to purchase Optional life insurance which is paid 100% by the employee.
FEGLI Optional Life Insurance – Federal employees have the option of purchasing three types of optional life insurance coverage.
- Option A – This option allows the employee to purchase an additional $10,000 life insurance coverage.
- Option B – allows the employee to purchase additional life insurance in amounts equal to up to 5 times your annual rate of pay.
- Option C – option C allows you to purchase additional coverage on your spouse and eligible children and is available in up to five multiples of coverage amounts which are $5,000 for your spouse and $2,500 for your children.
When a federal employee retires, he or she has the option (if qualified) to keep their optional coverage, reduce their optional coverage, or cancel their optional coverage.
We will not go into keeping your optional benefits when you retire because we recommend that you purchase individual term insurance which is a much better value.
What are FERS Survivor Benefits?
The Federal Employees Retirement System (FERS) is a retirement program developed for U.S. civilian employees. The program was designed for the executive branch, judicial branch, and legislative branch employees and not military personnel or employees of non-federal governments (state and local).
Under the FERS program, eligible employees are entitled to retirement benefits derived from the Basic Benefit Plan, Social Security, and the Thrift Savings Plan.
Basic Benefit Plan
The basic benefit plan provides for a qualified employee to receive a set amount no matter how much the employee has contributed to the benefit plan. The benefit amount is based on the length of the employee’s service and the average of the highest three consecutive years of pay (High-3) during your employment.
Employees who are age 62 or older and have a minimum of 20 years of service get a bump of 1.1% of the standard benefit amount. To determine your annual pension benefit you would use this simple formula: High-3 times Years of Service times Pension Multiplier.
All employees covered under the Federal Retirement System also pay 6.2% of their earnings into Social Security which is matched by the employer. This benefit is also available to the employee at retirement.
Thrift Savings Plan
The Thrift Savings Plan is similar to a 401(k) that the employee can contribute to (up to 5% of earnings) with up to 5% matched by the employer.
Certainly, the FERS program can be a considerable retirement package for the employee, but what happens to the benefit when the employee dies?
What happens to your FERS benefits if you die while you’re still working?
Under FERS, if an employee dies while he or she is still working, the surviving spouse will receive a lump-sum death benefit of 50% of your salary or High-3, whichever is greater plus $32,326 provided you had a minimum of 18 months of service. If you had worked at least 10 years or more, your surviving spouse would receive a full survivor annuity.
What happens to your FERS benefits if you die after you’ve retired?
Unless your spouse agreed to a lesser annuity amount or none at all, as an eligible surviving spouse, he or she is entitled to the basic death benefit plus 50% of your final salary (or your high-3 if that is a larger amount). This will typically be about $33,000.
There is a Better Way!
Although FEGLI and FERS are very good programs for federal employees, there are some significant drawbacks that can be overcome using Term Life Insurance from the individual insurance marketplace.
For example, the optional coverage available through FEGLI becomes very expensive for the employee when they reach age 50.
The cost of the optional life insurance coverage when the employee reaches age 50 becomes almost unaffordable when compared to what can be purchased in the private insurance marketplace.
Here is a Hypothetical Case for Gabrielle Otiz:
Gabrielle Ortiz, Logistics Management Analyst
Federal Aviation Administration, Fayetteville, NC
Current Series, Grade/Step: GS- 0343-13/6
Plans to retire at age 68
Health concerns: None. He doesn’t smoke.
Current FEGLI Participation: FEGLI Basic
Pays per pay period: $15.60
FEGLI Option A: 0
FEGLI Option B: 5 times salary $56.10 $510,000
FEGLI Option C: 0
Gabrielle’s Needs and Our Solution:
Gabrielle wants life insurance in the amount of $1,000,000 to age 80. Even though this doesn’t show cost savings, he intends on using this policy as a substitute for the survivor benefit plan over retirement. We recommend Gabrielle pick up a 30 year, fully underwritten term life insurance policy with a $1,000,000 face amount, keep FEGLI basic and drop FEGLI option B.
The result: Over the next 30 years Gabrielle will have a $1,000,000 life insurance policy with a fixed cost of $348.21 monthly. He plans on using this instead of giving up 10% of his salary to fund the survivor benefit plan.
Here is another example for Kim Chi:
Grace Chi, Program Analyst
Department of Veteran’s Affairs, Washington, DC
Current Series, Grade/Step: GS- 0343-13/8
Plans to retire at age 67
Health concerns: None. She doesn’t smoke.
Current FEGLI Participation: FEGLI Basic
Pays per pay period: $18.30
FEGLI Option A: 0
FEGLI Option B: 5 times salary $66.00 $600,000
FEGLI Option C: 0
Grace wants life insurance in the amount of at least 5 times her salary but wants to reduce the rising cost. We recommend Grace pick up a 30 year, fully underwritten term life insurance policy with an $800,000 face amount, keep FEGLI basic and drop FEGLI option B.
The result: Over the next 17 years Grace will save over $26,000 in life insurance costs and have a fixed cost of $179.22 monthly for a 30-year term life insurance policy with a face amount of $800,000 through age 80.
The Bottom Line
The bottom line and purpose of this article is to inform federal employees that they have options when they select their life insurance and retirement benefits.
The Term Life Insurance that is available in the private insurance marketplace has never been cheaper than it is today.
Innovative technology combined with competition has made a significant impact on the cost of Term Life Insurance is the individual marketplace.
Yes, the federal government offers valuable benefits when it comes to life insurance and survivor benefits, but if employees would compare what they are paying through FEGLI and FERS, they will find that the commercial insurance marketplace will save them money on their benefits and increase the payout to surviving loved ones.
If you are employed by the federal government and approaching age 50, now is the time to discover if the benefits that you’ll leave your surviving loved ones will help them move forward financially or place them in an unfavorable financial position if or when you die.