FEGLI Open Season? Here Are 4 Alternatives

The FEGLI open season is starting in one month on September 1^st, 2016!  Should you get more FEGLI coverage?  Not so fast!  Before you change your FEGLI coverage you should weigh FEGLI against four other forms of life insurance.  (See my major words of caution at the bottom of this post).

1. TERM Life Insurance:

Term insurance is insurance that covers you only for a limited term (ex. 10-years, 20-years, 30-years, sometimes longer), but after the term, the insurance coverage lapses (or renews for exorbitant premiums). Term is often the best insurance for people whose survivors will have a defined term of dependency, for example dependent children.  Usually children are dependent for a few years (ex. through college) but then they’ll be independent and on their own.  If your survivors will have a defined term of dependency, term insurance is often the best option.  It provides a large death benefit for relatively little cost.

FEGLI vs. Term life:

If you have a term need, you will almost always be paying more for FEGLI than you would with term insurance. I have found that FEGLI is often 2x or 3x  or 4x more expensive than term.

2. WHOLE Life Insurance:

Whole life insurance is insurance that covers you for your whole life, so there’s no point where the coverage lapses (unless you stop paying your premiums).  In contrast with term which we said was most appropriate when you have a defined term of dependency, whole life seemingly is most appropriate when you have someone who will be dependent upon you indefinitely, meaning for your whole life.   This is often the case when one has a spouse with no resources of their own, or a special needs child who will not become independent.

FEGLI vs. Whole life:

If you have a whole life need, you will again likely fall short with FEGLI.  FEGLI is not like whole life for three very important reasons:

• FEGLI rates keep rising even through retirement, unlike typical whole life which has fixed premiums.
• FEGLI does not build cash value, unlike typical whole life policies which do build cash value.  Cash value is a monetary benefit of your whole life policy that you can access even while you’re alive for whatever purposes you’d like.  Should you ever decide to cancel your whole life policy (for example, the person who you were protecting pre-deceases you) you can get all your cash value.  Should you ever cancel FEGLI, there will be no cash value.
• You can easily spend more in FEGLI premiums than you will eventually get as a death benefit from your FEGLI policy!!! This cannot happen with a pure whole life policy.  With whole life, the death benefit must always exceed the premiums paid.

3. Retirement Survivor Pensions (for both CSRS & FERS employees):

Survivor pension are a form of Life Insurance!  Life Insurance is a monetary benefit that becomes available to a survivor when the insured passes away.  Survivor pension is a monetary benefit that becomes available to a survivor when the insured (i.e. the Federal annuitant) passes away.  When you retire, you will have the option to elect a survivor pension for your spouse (or an insurable interest).  This survivor benefit pays out only when you pass, and the maximum it will pay is 50% of your FERS pension (55% of CSRS pension).  This benefit will cost you about 10% of your retirement pension, every year.

Survivor Benefits vs. FEGLI:

Comparing Survivor Benefits to FEGLI is difficult because Survivor benefits are not a lump sum insurance payout, but rather a stream of income for the lifetime of the survivor.  The value of a stream of income is tied to the amount of years your survivors will outlive you.  If they outlive you by many years, the survivor benefit will end up being more valuable than FEGLI.  If they outlive you by a few years, FEGLI may end up more valuable.  Also, Survivor benefits allow your survivors to remain in FEHB after you pass.  FEGLI does not.

4. Self-Insurance:

Self-insurance is the point where you have accumulated enough assets to dissolve your life insurance needs.  A person is considered self-insured if their passing doesn’t cause a financial discomfort for their survivors.  If you have enough assets to dissolve your life insurance needs, you are capable of self-insurance.  You may have already achieved that status, you are self-insured today.  Or, you may not yet have the status of Self-insured today, but you can plan to accumulate and grow your assets to the point of becoming self-insured in the future.

So who should get FEGLI? 

There are a couple of situations when I feel FEGLI is worthwhile to keep:

• FEGLI is appropriate is when a person has poor health and is not going to get private insurance without paying a hefty premium.
• Also, FEGLI has an option called “Basic” which will become free (at the later of retirement or age 65). For someone who is near retirement, it is often wise to just hold onto your FEGLI Basic and let it become free.  (FEGLI options “B” and “C” don’t become free.)

MAJOR WORDS OF CAUTION:  Anyone who is looking for more insurance coverage should apply to increase their FEGLI coverage this open season, NO MATTER WHAT!  Why?  Because this will protect you should you fail to obtain the other types of insurance.  Other types of insurance may require medical underwriting.  Depending on your health you may not be eligible for insurance elsewhere.   If you are successful getting other insurance, you will be able to cancel your FEGLI open season changes.

Stephen Zelcer is part of the GovLoop Featured Blogger program, where we feature blog posts by government voices from all across the country (and world!). To see more Featured Blogger posts, click here.