Webinar Replay: New FEGLI Premium Changes

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Delivered on: Friday, November 12, 2021

To Watch on YouTube, CLICK HERE

New FEGLI Premium Changes

How lower costs just got more expensive

Review new FEGLI premiums effective 10/1/2021
Understand the FEGLI trap and why so many employees get caught in it
How to get a handle on life insurance planning as you prepare to retire

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Prefer to read instead? A transcript of this webinar is below:

Hello everybody, Chris Kowalik here with ProFeds. We are delighted to have you here for our webinar today on the new FEGLI Premium Changes. I am the founder of ProFeds and the developer of the FedImpact Retirement Workshop that many of you have already attended.

I, of course, am the host of the FedImpact podcast as well. And like I mentioned, our support team is standing by for your questions. I’m going to stay really focused on delivering the material, and the support team will answer your questions in the chat.

New FEGLI Premium Changes: How lower cost just got more expensive

Today’s topic is all about the new FEGLI premium changes. How lower costs just got more expensive? Like how can that be if costs went down, how is it more expensive? Well, stay tuned, you’re going to find out today.

Agenda

For our agenda, we’re going to review the new FEGLI premiums that went into effect last month. I want you to have an appreciation for what we call the FEGLI trap, and why so many employees get caught in it.

And then to really look at the bigger picture of how to get a handle on the life insurance planning as you prepare to retire. Some of you think your life insurance needs have gone up. Some of you think they have gone down, some of you are just not quite sure. So how do you know for sure? We’re going to talk a little bit about that today.

And then at the end, boy, don’t miss this because you need to know what not to do after today’s session. Again, like I said, we have too many employees that make some bad decisions after getting a little bit of a glimpse into what FEGLI looks like and we want to make sure that you are not one of those people.

THE BASICS

Let’s talk about the basics. We, of course, want to make sure that everybody listening today has a general understanding of the different parts of FEGLI and how it works and what coverage is available and all that, and then we’ll jump into the premiums here in a bit.

Coverage Amounts and Cost

The basics of the FEGLI program: this program was designed to be a group term life insurance program. And the term that the government wanted you to have this coverage in place was while you are employed.

It’s not designed to be kept in retirement, although the government will allow you to do that, they’re going to make it very painful to keep all of it. It’s just going to be way too expensive to try to keep all of this coverage in place. So, let’s take a look at what the coverage looks like. There are four different parts of the FEGLI program.

FEGLI options (while employed)

You have the basic coverage, and then you have some three add-on coverages that are called option A, B and C. In order to have any of the options, you have to have the basic coverage. So, the basic coverage, we take your salary, rounded up to the next $1,000 and add $2,000.

You’re going to see an example of all this here in just a bit. Option A is a flat $10,000 of coverage regardless of your salary. And option B is a salary multiplier. We take your salary rounded up to the nearest $1,000, and multiply by the number of multiples that you’ve elected, somewhere between one and five.

The Basic, Option A and Option B is coverage on your life as the employee. Option C is coverage on the life of your family members. So, a spouse would be covered somewhere between $5,000 and $25,000 depending on the multiple that you’ve elected.

And children are covered somewhere between $2,500 and $12,500. Again, depending on the multiples that you’ve chosen for Option C. Now, a special note, children are covered up until the age of 22. And after 22, if they were disabled prior to the age of 18.

Just a little bit of a side note, many of your children, by the time you’re preparing for retirement, many of your children are well past this age. And so, Option C for your children may not really be a factor for you. But some of you that got started making a family a little bit later in life might still have some children covered.

FEGLI 5-Year Rule

In order to be able to keep FEGLI in retirement, which is something a lot of employees try to do, you must be enrolled in this coverage for five years immediately prior to retirement. Not just the basic coverage, but any of the options that you wish to keep in retirement.

You can’t just jump in right before you retire or right when you realize that you have a critical illness or something that would make you uninsurable, you have to have this coverage in place for five years immediately prior to retirement. And you must be enrolled in the FEGLI program on the day that you retire. So, very, very important that you first meet the rules to be able to keep this coverage in place.

THE PREMIUMS

Let’s talk a little bit about the premiums. Before I jump too deep into this, let me share with you that looking at life insurance premiums can be a little bit mind numbing. And so, I’m going to show you the numbers because I want you to see what they are. And then we’re going to show an example to break it down so that it’s a little bit more palatable for the average person that doesn’t deal with life insurance premiums every day, and their weird structure.

Recent Changes

Let’s first talk about the overall changes that happened last month. We’re talking October of 2021. The premium changes were announced, and they went into effect relatively quickly. And I have good news and I have bad news for you.

The good news is that overall, as an employee, your premiums went down while you’re working. The bad news is they went up later in retirement. We want to be careful if we’re looking at FEGLI as a long-term play, which some of you are because you haven’t really considered what to do in the private sector as an alternative.

We have to be curious and pay attention to what happens to those premiums much later in life, when we’re as close to our mortality as we’re ever going to get. Something interesting that we found, although these premiums were supposed to go into effect the first pay period after October 1st, we have seen a lot of payroll processors mess this up.

Something interesting that’s happened is some of the payroll processors have adjusted the optional coverage costs, but they didn’t adjust the basic costs. If your premiums weren’t taken out properly for maybe a couple of pay periods, you need to be prepared for them to take those back premiums.

And the amount of coverage that you’ve had will determine what that premium difference is. In the alternative, if they fail to adjust a premium that went down, then you’ll get a credit and get that squared with you. But this was not a smooth process to get all the payroll processors on the same page.

Premiums While You are Working…

Let’s talk about what premiums look like while you’re working. And I’m going to warn you before I even show you this next slide there’s a lot on it, so follow along with me. I wanted to put all of the premium side by side so that you could see them.

I also wanted to be able to illustrate how these premiums have changed from what they were prior to October 1st to what they are now. We have all the ages on the left-hand side. And then we’ve got the Basic, A, B, and C, all broken out between the old premium and the new premium. Let’s take a look at that Basic column. Life insurance is priced by cost per $1,000 of coverage. Cost per 1000.

You’re going to see an example here on the next slide, so sit tight. But I do want to illustrate to everyone that for the Basic coverage, the price is the same for everyone who is working, it does not matter how old you are. The old price was 32.5 cents per $1,000 of coverage. Now it is 34 and a little over a half cent. It’s important to recognize that there was a massive change. By that I mean, the difference in cost was not massive, but it affects a lot of people.

Because if there’s one kind of FEGLI that everyone has, it’s the Basic coverage, because you can’t have any of the options without the Basic. We know that everyone was affected who has any kind of FEGLI coverage based on the fact that the Basic coverage just went up.

Anytime we see the premiums increase for you as an employee, you’re going to see them in red. If we see them go down, so operating in your favor, they’re going to be green. Anytime you see the pure black premiums, that indicates simply no change to the premium from the previous year.

For Option A, you’ll see for certain age bands, the price got a little bit better. Option B, same thing, except once you hit age 80, that premium has gone up, because you’ll see it’s in red. For Option C, I do want to point out that this is priced a little bit differently, instead of cost per 1000, it is priced at cost per multiple that you’ve elected.

Remember with Option C, this is coverage on perhaps multiple people in your family, your spouse and any eligible children. And so, having cost per $1,000 of coverage gets a little bit wonky in a program like this. So, it’s the cost per multiple for Option C. Again, things got a little bit better as an employee. Then in retirement ,of course, they get more expensive.

Presumably you don’t have eligible children on Option C anymore, it’s just your spouse, but you’re paying the same regardless of how many family members you have. Just by virtue of that, it feels more expensive because you’re covering fewer people’s lives. I want to give an example to take this kind of mumbo jumbo of life insurance illustrations here and put it into an example, so that we can all see like the real-world impact of these premiums. Again, these are using new premiums for the FEGLI coverage.

Example of Calculations While Employed

Here’s our example of an employee who is 54 years old and has a salary of a little over $52,000. If you make double this, if you make triple this, you can plug in all of your own numbers, but this is the example that we’ll use. For the Basic coverage, they have a total of $55,000 of coverage.

To price it, we would glance back at the previous table and use the right numbers. Remember, we’re looking at the age 54 line of the previous slide, and we’re going to take that 55, remember this is priced per 1000. We have $55,000 that we’re going to calculate here. So, 55 times 0.3467. And that gives us a monthly premium of $19.07. Now keep in mind, this is not your per pay period premium. If you wanted to get that, you would take this $19.07 multiply by 12 and divide by 26.

Don’t take the $19.07 and divide by two, that won’t give you the right number. Option A, remember, is a flat $10,000 of coverage. Remember that we’re pricing per 1000, we’re going to take 10 times 0.217. Again, for age 54, that number is 0.217. That tells us that we’re going to pay $2.17 per month for Option A. Of course, it’s not very much money as far as coverage is concerned. And so that’s why we’re seeing such a low premium there.

For Option B, we’re going to show this employee having all five multiples, and so in total it will be $265,000 of coverage. Keep in mind, for Option B, we take your salary rounded up to the next 1000 and multiplied by the number of multiples you’ve chosen. It is different than the basic coverage. Remember for the Basic, we round up to the next 1000 and add 2000. Just make sure you’re using the right numbers here.

For $265,000 of coverage, on the right-hand side you’re going to see that cost, we’re going to take that 265 times 0.217. and we come up with $57.51 per month. Remember, Basic, A and B is coverage on your life. Option C is coverage on the life of your spouse and each eligible child. Remember it does not matter how many family members you have as long as you have at least one, the price is the same no matter how many add to that.

If we know we have five multiples and this is price per multiple, we’re going to take five times 1.800. and that gives us $9 per month. All of these factors that we’re using in the cost, we derived from the previous table, right on the previous slide. That gives you an idea of how we arrive at all the pricing for each of the different types of FEGLI coverage, at least while you’re working.

In Retirement…

In retirement, boy, do things get way more complicated! Before I jump into the premiums and the different choices you’re going to have, let me share with you that the decision about what is going to happen to your FEGLI coverage in retirement is made along with your retirement application itself.

Even though some of the changes happen later in life, we want to make sure that you know that you are deciding that fate when you fill out your retirement package. It’s a special document called the FEGLI continuation of coverage. And that will tell FEGLI, and frankly OPM, what it is that you want to have happen to your coverage in retirement. It doesn’t happen right away, it happens later.

FEGLI Basic Coverage – Elections in Retirement

Let’s talk about the Basic coverage. See, I told you it got more expensive, right, just looking at this slide probably gives you some anxiety, but let’s walk through it step by step.

For the Basic coverage in retirement, you have three choices. No matter what choice you make at the time that you retire, let’s say you’re 55 that’s the example we’re going to use. At 55, from that point all the way until 65, you’ll have full coverage no matter what choice you’re making for what happens to this Basic coverage. But then at 65, the change happens.

If you selected what’s called the 75% reduction, that means that it’s 65 or retirement if that happens to be later for you, your coverage will begin reducing by 2% per month until only 25% of that coverage remains. The pricing for this coverage is different from the time you retire up until 65 and then from 65 on. The new premium that will happen prior to age 65 will be 34.67 cents per 1000. And you’ll notice that at 65, under that 75% reduction option, your coverage is free from that point forward.

Whenever you hear people talk about the free part of FEGLI, this is what they’re talking about. You will notice, of course, that 0.3467 per 1000 is the same number that you’re paying right now as an employee. They’re going to let you carry over that same premium as long as you select that 75% reduction.

And all is well and good to get free parts of government programs as long as you actually have the right amount of life insurance in place in this case. I don’t want you just to chase after the free part because it’s free and then come to find out you actually don’t have the life insurance that you need or want to have for the long term. That’s the 75% reduction.

The 50% reduction operates in a very similar way, you’ll have full coverage all the way out until age 65. And then at 65, or retirement if that happens to be later, your coverage begins reducing by 1% per month until only half of it is left.

The new premium for prior to age 65 has gone up, to 1.0967 per 1000. Again, you’re going to see an example of this here in just a moment. I do want you to realize it got more expensive with these premium changes. After the age of 65, if you’ve taken that 50% reduction, you’ll see your premium actually goes down a little bit. And this is not a typo I promise, it does go down slightly at 65 to 75 cents per $1,000 of coverage.

Now the no reduction option is if you say you want to keep all of this coverage in force, not only to 65 but beyond, then you’re going to see a massive premium increase immediately when you retire. You’re going to go to $2 and almost 60 cents per $1,000 of coverage. And at 65, you’ll see that price again go slightly down from that point forward. That’s the Basic coverage. That is by far the most complicated of all of the choices you’re going to need to make with respect to FEGLI.

FEGLI Option A Coverage – In Retirement

Let’s talk about Option A in retirement. Just like with the Basic coverage, you’re going to have full coverage for Option A all the way out until 65. And then the benefit itself changes and the pricing changes. With Option A, there’s not really a choice of what is going to happen to this coverage.

If you take Option A into retirement, there will be an automatic 75% reduction to this program when you turn 65. The coverage will begin reducing by 2% per month until there’s only 25% of it that remains. Because we’re only starting with $10,000 of coverage, it’s going to reduce down to $2,500. We’re not talking about a lot of coverage here by any stretch.

You can see that the pricing got a little bit better for you under Option A, at least up until the age of 59. But then by the time you hit 60, the premium has stayed the same from what it was previously, before all these premium changes and then you’ll see it’s free from 65 on. You basically get $2,500 of coverage for free from 65 on. Option A is relatively straightforward, not a whole lot of choice that you have here.

FEGLI Option B Coverage – In Retirement

Let’s talk about Option B in retirement. In this case, just like with Basic and A, you’re going to have full coverage out to age 65. And then you get to choose between one of two things to happen to your Option B multiples, either a full reduction, meaning it all goes away, or no reduction, meaning it all stays in force. This choice is technically made per multiple that you have.

It doesn’t have to be all of your multiples operate a specific way. If you had five multiples, you could say I want two of them to be full reduction and three of them to be no reduction, for instance. But let’s talk about the bigger picture here. If you go full reduction, which is the default, if you make no decision, this is what happens to you, you’ll see that your pricing, up until the age of 65, got a little bit better with these new rates.

We’re always happy to save some money for a program like this. If you do the no reduction option, meaning you want to keep all of that Option B coverage, which is by far the most coverage that you could possibly have in the FEGLI program, you’ll see again, pricing got better up through age 74. But once you hit 80, that price will be considerably higher than what it was in the prior premiums, prior to October of this year. In some ways the premiums have gotten better, in some ways they’ve gotten worse.

FEGLI Option C – In Retirement

For Option C coverage, just like all of the other choices that you’ve had for FEGLI, you’re going to keep full coverage out to age 65. And then one of two things is going to happen. Either there will be a full reduction, or no reduction at all. Full reduction means all your coverage will go away, no reduction meaning that you get to keep all of it.

These are the same choices that you had for Option B, so they should look familiar. At 65 under the full reduction, your coverage begins reducing by 2% per month for 50 months. It’s not going to go away immediately, it’s going to peter off over time. And if you select this option, you’ll see that your premiums got a little bit better up until age 64.

And then at 65 of course, it’s free from that point while it’s reducing. Then by the time you’ve hit 70, there’s no coverage left ,so we can’t really say it’s free, because there’s nothing that it will pay. The no reduction option. Again, you’ll see premiums got a little bit better up until age 69. At 70, they’re the same as they were previously. And then from 75 on, they got more expensive.

What’s really more expensive about Option C is if you are younger and you’re married, and you have children, presumably a lot of children, Option C is a great deal, because you’re covering lots of people under one price. And that’s beautiful. But once your children start aging out, and you just have your spouse covered, Option C feels more expensive because it’s covering fewer people.

EXAMPLE

Let’s take a quick look at an example here. The government makes things pretty complicated for sometimes no good reason. But I want to lay things out as clearly as I can for everybody here. In our example, this employee is now 55. In the previous example, we showed them as being 54. They just turned 55. And they still have their salary of $52,250 per year. I’ve broken out what all of the choices are that they would have and showing what the initial cost is at retirement.

For the basic coverage, they still have $55,000 of coverage. And remember, they have three choices. They have the 75% reduction, the 50% reduction, or no reduction. And you’ll see the respective prices over on the right-hand side.

One thing that I do want to point out what I think confuses people for a good reason is if we look at the 75% reduction for the Basic coverage, when we look at pricing it, we’re still using the base amount of $55,000 of coverage, even though you don’t actually still have that amount once your coverage has reduced by the 75%.

That 55 is used in all of those calculations for the basic coverage even though that is not the amount of coverage you actually have in place. This is government math here. And so, I want to be very clear because sometimes when we see employees try to hand calculate what FEGLI is going to look like, God bless you for trying to do that.!

But if we plug in the wrong number, then we’re going to get a much lower premium, right? We want to make sure you’re using the base amount of 55 in that calculation, and then applying the appropriate premium based on the choice that you’re making, 75%, 50%, or no reduction. And of course, all of these prices are driven by your age at the time that you retire.

Remember, we’re showing the initial cost at retirement. It doesn’t stay this amount as far as these premiums we’re showing on the right-hand side, but this is what it will initially be when you step into retirement. Option A, again, is a much simpler $10,000 coverage.

We know at 65, it’s going to reduce by 75% to leave only $2,500 of that program. And the pricing, at least when you first leave federal service, will be 10 times 0.390, or $3.90 per month. Option B, this is the one that gets pretty expensive, especially the longer that you keep it in retirement.

Option B, we’re going to show this employee having five multiples, so they have $265,000 of coverage still. And remember, they had two choices with Option B, they could do a 100% reduction, or a no reduction. Something interesting that most people don’t know is regardless of which choice you make, you pay the same price up until 65.

You’ll see both of these are calculated exactly the same way, you’ll gain $103.35 per month and then things will change later. If you have chosen no reduction, meaning you’re going to keep it beyond the age of 65, then you will see the premiums start ratcheting up pretty quickly. You’ll see a bigger example where we put all this together in just a moment.

Now, for Option C, remember, this is coverage on the life of your spouse and any eligible children. If you’ve taken a 100% reduction, or a no reduction, the price is exactly the same. We’re going to take five multiples times 2.88, which again, is the premium from the previous slide, and we get $14.40 per month. Now that we’ve covered that, your brain’s probably scrambled up a little bit on how all this works.

The FEGLI Trap

Let me share with you a concept that we call the Trap, the FEGLI Trap to be specific. The FEGLI Trap is that the program looks so good while you’re working, that you don’t ever bother looking at any other alternatives. You say, this is pretty good, this is pretty cheap coverage. It’s easy, I don’t really have to think about it, I got it when I was first employed, or maybe I had some qualifying life events.

This is great, and I’m just going to keep this. Until you get older, and the cost continues to rise. And this happens even while you’re still working, the older that you get, the higher those premiums are. Aside from the Basic coverage, which is the same for everybody.

The other trigger point where people really start paying attention is when they retire. And if you’re trying to keep all of this coverage in force, that cost just becomes unbearable. You’re probably not going to be able to afford to keep it and you’re also as close to your mortality as you’ve ever been in your whole life.

It doesn’t mean your life insurance needs end; it means you simply can’t afford it. So, you cancel it, or you start peeling away different parts of the FEGLI program to try to manage your cost. That can become very, very dangerous.

Example

What I’d like to do is to look at an example of an employee, this person we’ve been talking about, who has a final salary of $52,250. And we’re going to show them having and keeping all of the FEGLI that they could have on their own life in retirement. So, the Basic and Options A and B times five. We’re not putting Option C on here because that coverage is on the life of the family members.

This is just what the employee can have if they were to die, what their beneficiaries are going to get. At age 54, right before this person retires, they had a total of $330,000 of coverage for the Basic, A and five times B. If you look back at the previous slide where we showed what things look like in the example of an employee while they’re still working, you would see it tallies to $330,000 of coverage.

It also cost them $78.75 per month for that coverage, which is not too bad, right? It looks pretty good while you’re employed. But at 55, right when this person retires, if they wish to keep all of that coverage, that $330,000 of coverage, it’s going to cost them $250.07 per month.

This is a drastic change in premium that you will likely not be prepared for. At 60, you’ll see that premium jumps. At 65 there’s a smaller jump because remember, some of those premiums actually went down at 65 slightly, and so it’s leveling off here a little bit.

But then at 70, we have another massive jump, and again at 75. And I have good news and bad news for you at age 80, the premium for this employee is $1,777 a month, that’s the bad news. The good news is your premium stops going up at that point. I’m not sure that that’s good enough news to hear when you’re paying over $1,700 a month in premium.

Keep in mind, this is for an employee who makes $52,000 a year. If you make double that or triple that, do the math. This is going to be unbearable to keep. Remember, FEGLI was not designed to be kept forever. It was designed for you to have while you are working, not in retirement.

That’s not a knock on the program, that’s just recognizing what it was designed for and if we try to manipulate it to be for us long term, it is very, very painful. Something interesting happens. You’ll notice at that at the age 65 mark, the coverage actually goes down a little.

Remember that Option A was the $10,000 and it goes down to $2,500. That’s why you’re seeing this drop in coverage. By the time this employee reaches the age of 87, from 54 to 87, they have paid more in FEGLI premium than the death benefit will pay out to their family. That’s not how life insurance is supposed to work!

You’re supposed to pay a little bit of money every month so that your family gets a boatload of money when you die, right? That’s the idea, at least in the big picture. But we’re seeing the effect of trying to force a program to be something it wasn’t designed to be.

FEGLI has served many of you very, very well, to have the peace of mind that if something happened to you and you’re young, you’re still working, you’re worried about income for your family, all those normal things that people feel about life insurance, those are all super important.

They can still be important in retirement, which is what we’re going to talk about next. But this program to satisfy that long term play for life insurance can be very, very dangerous because of the cost.

THE PLANNING

Let’s talk a little bit about the planning that comes along with life insurance.

Two Truths About Life Insurance

We share this in our workshops. There are two truths about life insurance, nobody likes to talk about it, and nobody likes paying for it. So, get over it, put your big boy hat on, and recognize that this is going to be an uncomfortable conversation, because you’re talking about what everybody’s going to do with the money that you left them when you die.

Again, get over it, put your business hat on and recognize that even though it’s uncomfortable to talk about, having the right life insurance in place when you die can mean the difference between financial chaos and peace for your family.

I know this firsthand because we work with a lot of widows of federal employees and federal retirees that have no idea what they would have done without life insurance in place once their spouse died. I see it firsthand. Every single day we’re working with the FEGLI program, and we see that effect that it has on a family.

It doesn’t mean they’re not going to miss you, it doesn’t mean that there are other things you can do to try to help, like keeping TSP high, and all those good things. But life insurance has a very specific role, or really several roles that it can play in retirement.

The Role of Life Insurance

Life insurance makes money magically appear when you die. You weren’t saving it, you weren’t investing it, you were paying a premium every month. When you die, this money magically appears. And typically, it’s designed for things like providing continued income for your family.

If your pension goes away, all or in part, if your pay should go away right now, your family still needs income, right? Then we have final expenses or paying off debt, those are things that people would say, well, God, if something happens to me, I want to make sure the mortgage is paid off, or the credit cards are paid off, or whatever it might be so that my family doesn’t have to take on any of those burdens. It’s all taken care of.

And then last but not least on this list is leaving a financial legacy. This has to do more with a life insurance want than a life insurance need. What I mean by financial legacy is being able to gift a large sum of money to your family specifically; it’s intended for your children or your grandchildren, that’s where the legacy piece you’re passing generations. That you’re leaving that money to them when you die.

If you run out of people that you like, you can give your money to a church or a charity or a cause if you wish. When it comes to legacy planning, I had a conversation with my mom, and she said, “Listen, if I would have known my grandkids were going to be so great, I would have been nicer to their parents.”

She and many others like her are saying, “Okay, I don’t need to take care of my grandchildren, my children have that taken care of. But I would love to leave a legacy for them if something should happen to me, or really when something happens to me.” Whether it’s money towards paying off college debt, or a pending wedding, or raising their own children, or putting a down payment on a home. Those are all things that we find a lot of grandparents wanting to do for their grandchildren.

Life insurance of course, can also be used to design more sophisticated tax strategies for income in retirement. This part gets a bit more complicated, and you need to seek the advice of a financial professional to do this to make sure that you’re covering all of your bases. But there’s a lot of things that life insurance can do for you even in retirement, and I would offer better for you in retirement because the likelihood that you are going to die in that span of your life is 100%, right?

If you’ve made it to retirement, you’re not getting out of retirement alive. And so, if you want that life insurance in place when you die, we have to make sure that this is an affordable program whatever you’re enrolled in, that you can keep.

Side-By-Side Comparison: Government FEGLI & Private Life Insurance

What I’d like to do is to do a side-by-side comparison between the Federal Employees Group Life Insurance and Private Life Insurance. I’m not going to talk about a specific product or a company, but I want you to understand generally, how they are different and identical in some ways as well.

As far as how to qualify under the FEGLI program, you were automatically allowed in when you were first hired, which is beautiful. That’s how group life insurance works and what an amazing thing that is. After that point, if you didn’t get in when you were first hired, you have to either qualify for the coverage, or experience a Qualifying Life Event. Get married, divorced, the death of a spouse or the birth or adoption of a child. Those are the most common QLEs.

Under private life insurance, of course, you have to be healthy enough to qualify for that coverage. You have to go through underwriting, they’ll ask a series of questions. They may do blood or urine work, just to make sure that everything you answered is accurate. And as long as you’re approved, that policy can be issued.

As far as the FEGLI program goes for coverage, this is where we see the first limitation of the FEGLI program. And that is, the amount of coverage that you can get is limited because it’s based on your salary. If you have a desire for a large legacy that expands beyond what FEGLI can give you, there’s only so much you can get in the FEGLI program.

Other than that, you’re going to have to go out to the private life insurance side. Under the private life insurance side, the amount that you can get is virtually unlimited and can include some different features that are not available in the FEGLI program, like building cash value that you can borrow against tax free. Living benefits, this would be the ability to borrow against your own life insurance program while you’re living as opposed to waiting until you die, and your family gets money.

Long-term care benefits are interesting with a life insurance policy, this has to be structured this way. But in the event that you have a long-term care need, meaning you’re not able to feed yourself, bathe yourself, dress yourself, those things we do every day and don’t even think about it, you may qualify for coverage to be paid to you in advance so that you’re able to take care of those long-term care needs.

But if you don’t end up needing it for that, it’s simply paid as a death benefit to your family. So, a lot of flexibility in how you’re able to use these life insurance products, because the life insurance industry knew that they needed to get more creative so that people understood that flexibility that was possible in these programs to allow you to use your money in very different ways. The next way that these programs are slightly different is how they’re paid.

For FEGLI, they’re paid right from your paycheck or your pension, of course, and then the cost increases depending on the options that you’ve selected. You saw that if we try to keep all this coverage in place as a retiree, it’s going to get painfully expensive.

Under private life insurance, these premiums are typically paid monthly with a bank draft, or something like that, that makes this nice and easy, so you don’t ever forget to pay. And the cost could be level or increasing. It depends what type of coverage you put in place. There’s several different kinds out there that are designed for different purposes.

You could lock in a premium, which is attractive for a lot of people, or it could be an increasing premium as well. It’s worth looking into. In the next three ways these programs are exactly the same. You can name anybody or entity that you wish, all of the money is paid out in lump sum at the time that you die. And all of it is paid income tax free.

Whomever your beneficiaries are who are receiving this money, they don’t pay any income tax on it which is beautiful, at least for now. This is something that is being batted around as far as changing, who knows whether that will change or not. Hopefully, it’s just some rhetoric in Congress and in the White House, but at the core life insurance being income tax free has been the standard and I hope it stays that way.

This gives you an idea of some of the differences between these two programs. Something I normally ask in the workshop and our speakers ask is, if you were to die while you’re employed, or even as a retiree and you have the FEGLI program in place, who pays the death benefit to your family? And most people think it’s the treasury, or your agency or OPM, somebody like that. And it’s not, it’s Metropolitan Life. This is a government program, or a private program in a government wrapper.

I don’t want you to be afraid to go look out in the private sector for alternatives that serve you and your family well, and not have some strange loyalty to the FEGLI program just because you’ve had it for a long time. This is a private product in a government wrapper, and so do not be afraid to go look at your other options.

WHAT NOT TO DO

But I would be remiss if I didn’t talk about what not to do following today’s session. We see this all the time and I want to be very, very clear of what not to do. Do not go and cancel any of your existing life insurance coverage before you do these two things. The first is, you must conduct a needs assessment with a financial professional. They are able to help you sort through kind of what’s in your head of what you’re trying to protect, so that you can better articulate what your legitimate life insurance need is.

Most often when Feds get into FEGLI, you guys take a SWAG. When you’re first hired, you get a bunch of forms, your HR says, “Welcome to the government, fill all this out.” And one of them is life insurance and you just guess. So, SWAG is a scientific wild ass guess. And I would prefer that you not take a guess on something that’s so important.

First things first, even regardless of how much FEGLI coverage you have, having a needs assessment conversation will allow you to put pen to paper and get a total dollar amount that if it were up to you, what would be protected when you die? And then you’re able to compare that to the coverage that you have in FEGLI and say, first, do I have enough coverage? Is that the right amount?

And the second is, is it the right kind of coverage? Is it going to be there for me no matter how old I am when I die? Is it going to expire at a specific period of time, maybe before I wanted it to?

And last, I suppose on that needs assessment is looking at the long-term price of that FEGLI coverage and seeing if that’s sustainable for you. Based on that assessment, you want to make sure that if you’re going to make a change like going out and getting different coverage from FEGLI, either to replace it or to add to it, you want to be certain that any other policy that you purchase is in force before you cancel your other coverage.

Please do not cancel coverage just because of what you heard on today’s session that, wow, FEGLI gets really expensive in retirement, and you think, oh, I’m going to save some money and I’m just going to go ahead and cancel it. You will regret that decision either from the grave when your family doesn’t have actually what they need, or when you finally do sit down with somebody. And you realize that, maybe because of your health, you don’t qualify for other coverage and there’s no other choice for you.

That’s not what we want to see for you, and we want to make certain that you have every opportunity to have the right coverage in place, whether it’s with FEGLI, whether it’s with private life insurance, or a combination of both.

Get the Rest of the Story

Of course, FEGLI is part of the decision that you’re going to need to make as you approach that retirement window. But you’ve got to get the rest of the story, right? The Paul Harvey.

I encourage you to attend one of our workshops, if you haven’t already done so, even if you have done so, come back through, listen to it again, you’re going to listen with different ears and hear and see with different eyes. Because you’re at a different place now than the first time that you watched this.

We do have a few virtual options available through the end of the year. We can try to accommodate you if you don’t see your city listed. And if you’re trying to get into a virtual session by all means we will try to accommodate you in any way that we can.

Of course, our live options require you to physically be present. But where employees really get the most out of this experience is when they’re live, in person, sitting in a room taking all of this in and letting the frying pan hit them between the eyes on some of these topics that they really need to be focusing on and getting their hands wrapped around as they approach that retirement window.

Now, for all of our workshops, there’s no cost to attend. We’re able to bring this on site to agencies as well and, of course, the agencies would pick up that fee. But as far as the sessions that you’ll see on our site, you’re able to register at no cost. And we’re going to cover all of the federal benefits topics and these decisions to be made right there in the workshop. So, you can find all the details at FedImpact.com/Attend. You’ll be able to see all the locations where we have workshops available.

Wrap Up & Next Steps

Thanks so much for joining us! This is a big topic. I know we just covered the FEGLI in retirement, gosh, I think back in July, but with these new changes that were kind of sprung upon us I felt like it was really important to get back in and refresh all this material so that it was really clear for everybody. Again, to find a workshop near you go to FedImpact.com/Attend to sign up for that next webinar on the TSP in 2022 go to FedImpact.com/Webinar. Thanks so much, we’ll catch you next month.